Financial Analysis/Retirement Scenario Case Study
Financial Analysis/Retirement Scenario Case Study
Dr. Steve, 52 years old and his wife, Barbara, the same age, live in urban Missouri,
where Mike has practiced for 25 years. They have two sons, ages 18 and 20, both in college. Mike makes $250K per year; Barbara makes $40K.
Projected retirement for Mike is 66 years; Barbara, the same.
Total portfolio savings for the family is $400,000. Savings per year: Zero for the next four years as Steve and Barbara pay college expenses for their sons. After that period, they will be able to contribute $60,000+ to retirement savings for the foreseeable future.
Debt:
They have a $20,000 Home Equity loan and one car loan of $4,000. Their house is essentially paid off. They have worked hard to keep debt under control over the years. Their prime concern is the inability to save over the next four years.
Special Future Expenditures:
• College for sons at $75K per year for two years, then $40K for two years.
• Vacation home in Mexico: they are considering if it is a worthwhile investment.
Special Future Receipts:
Practice Sale of $500,000. This is conservative, as Steve’s office has much high tech equipment.
Inheritance: Approximately $500,000 from Steve’s family in 20 years. None from Barbara’s family.
Life Insurance:
Steve---$2,000,000 term policy through ADA.
Barbara---$500,000 term policy through ADA.
Cash Saving Accounts---Not tax-deferred:
Cash and CDs: $110,000
Tax-deferred accounts:
Steve:
ADA 401(K) Group Annuities $200,000. 60/40 stock to bond mix. Stock is S&P 500 fund. Bonds are in a US index.
Barbara:
401(K) from her employer $90,000. Same mix as Steve has.
Home value:
$650,000; paid off.
No second home or rental property.
Social Security:
Steve will receive $30,000 at age 67. Barbara will receive $21,000 at age 67.
Special Future Expenditure Analysis:
For the next four years, all savings are planned to pay for college for the boys. This limits Steve to only 10 years to save the remainder needed for retirement at 66. If grad school is involved with the boys, my strong recommendation is to keep additional help from Steve and Barbara to a minimum. Loans and work-study are normally available.
As far as vacation homes are concerned, remember that real estate barely outpacesinflation sale-to-sale and rarely keeps up with inflation after taxes and maintenance areincluded. Also, with the political climate in Mexico today, any home may lose value. As far as USA properties, which also were discussed, the same low relative return exists. I would probably put off any purchase ideas until closer to retirement, as mortgage and other costs would inhibit Steve’s chances to save money. I would also recommend only domestic properties at this time.
As seen below in the analysis, if the proper deal comes up and Steve wishes to buy with little change to the $60,000 per year savings in four years, it might be OK to jump at the chance. I advise looking carefully at a Financial Engines-type analysis again before purchasing.
Life Insurance:
Steve---$2,500,000 term policy through ADA. Perfect!
Barbara---$500,000 term policy through ADA. Again, perfect.
If either dies prematurely, the income generated from life insurance will insure the success of the retirement plan for the survivor.
Investment Thoughts:
The ADA Plan is a group annuity account with consequent poor growth prospects. Feesare listed at above 2% per year and most likely higher, as insurance companies neverdivulge all costs. It would be prudent to have a professional adviser (CFP), either at adiscount brokerage, such as Vanguard or Schwab, or at an independent agency,analyze Steve’s allocation closely, diversifying properly.
Next, I recommend looking at transfer of the ADA funds to a discount brokerage custodian. I also recommended possible international equity exposure, as seen below.
For easy asset allocation examples, I directed Steve to Paul Farrell’s Lazy Portfolios at Market Watch. Go to I really like the Margarita and Coffeehouse portfolios, as they are easy to understand and easy to rebalance if one wants to handle investments on one’s own, as Steve indicated repeatedly. These funds have easily outpaced almost all market-timers in the last ten years.
To consolidate Steve and Barbara’s holdings makes total sense too. I’ve found that it’s quite easy to transfer the ADA annuities to a discount brokerage.
And always remember that the amount you put away each year is much more important than whether the fund are deductible or not. Many don’t contribute after-tax and really lose out on growth. All the very early retirees have most of their money in cash accounts, as they put much more in each year than they could deduct or defer.
Budget and Retirement Income Analysis:
Steve and Barbara’s retirement income need is calculated at $140,000, figured from the Budget Forms. This is average for a retired dentist.
Areas where spending is higher than the dental average: property taxes, and utilities. They are lower than average on entertainment and gifts. I think the budget for retirement is well balanced and needs no changes.
Both the manual calculation and Financial Engines (FE) software showed that in four years, after their sons are off the dole, with $60,000 yearly savings to age 66, they would be fine to retire at age 66. The large amount for the sale of the practice and Steve’s inheritance make up about 40% of the retirement income. FE shows that they will have $196,000 income, well above what they need.
Further FE analysis shows that without increasing risk, yet by changing portfolio allocation, they may receive $210,000 per year.
Without the inheritance, they will have $35,000 less per year in retirement income. This still will leave them in fine shape at age 66.
FE recommendations:
Tax-deferred account: Rather than a mix of 60% US S&P 500 and 40% US Bond fund from AXA Equitable, Steve and Barbara may convert to a Vanguard mix of 55% stock funds with half of that in international funds and 45% in US intermediate term treasuries.
After-tax account: FE recommends they have 70% in US Treasuries, 10% in international stock funds, and 20% in a S&P 500 index fund.
This increases the income average to $210,000 per year.
We also found that with the above mix, they may be able to retire at the $140,000 level they need at age 63. This assumes the full value of the practice sale and inheritance.
All said, Steve and Barbara are doing quite well at age 52. The major reason for their success-----almost no debt.
Both Steve and Barbara were advised that the exercise was provided from the standpoint of a dentist that was able to retire early, not a financial planner. My views are not to be taken as Gospel; in fact, a retirement budget and financial planning from an educated planner is essential to financial success.
They have been referred to either Vanguard or a Certified Financial Planner to have a full financial plan constructed, including risk assessment, insurance assessment, and estate planning.