What Is a Financial Plan? Part II — Retirement and Estate Planning

After preparing a highly detailed analysis of the Franklins� current financial position and their future income, expenses, taxes, and asset values, we were able to provide them with the following recommendations about their upcoming retirement and future estate.

Larry and Jill can meet their goal of retiring in two years. By following the recommendations outlined in this plan, they will be able to retire when Larry is 62 and Jill is 60 with an after-tax, inflation-adjusted income stream of $80,000 per year. Their sources of income will include $24,300 from Social Security and $55,700 after-tax from their investment portfolio. This is sufficient to maintain their current lifestyle which costs $80,000 a year.

Larry should begin Social Security at his full retirement age of 66. Larry and Jill are in excellent health and can be expected to live beyond their average life expectancies. Therefore, Larry should delay receiving Social Security until his full retirement age to get the higher monthly payment. As long as he lives beyond age 78, this will ensure he gets the maximum benefit from Social Security.

Jill should begin Social Security at age 62. Jill�s Social Security benefit under her own work history is estimated to be about $700 a month at age 62. She is entitled to receive the higher of her own benefit or one-half of Larry�s benefit, which is estimated at $1,800 a month at his full retirement age. Jill should start her benefits at age 62 of $700 per month, since this will have no effect on her long-term benefit. When Larry begins Social Security at age 66, Jill�s benefit will increase to $900 (half of Larry�s). By starting early, Jill will receive a total of $16,800 in extra benefits.

Contribute the maximum allowable amounts to your 401(k)s and Roth IRAs prior to retirement. Currently, Larry is contributing $10,000 to his 401(k) annually. Jill is not contributing to her plan. In 2004, Larry can contribute the IRS maximum: $16,000. Jill�s plan allows a maximum contribution of 15% of salary, so she can contribute $5,250. Qualified retirement accounts provide the best opportunity to reduce both current and future income taxes. We estimate that by maximizing pre-tax contributions to both of their plans, they could save about $3,600 in taxes annually.

We recommend that Larry redeem his whole life insurance policy. A needs analysis has shown that Larry and Jill have no requirement for life insurance. The policy should be cashed out and the $50,000 in proceeds added to their investment portfolio. This also reduces their monthly expenses by $100.

We recommend that Larry and Jill purchase long-term care insurance with a daily benefit of $100. The high cost of long-term care could quickly deplete Larry and Jill�s assets. We recommend purchasing policies with a five-year benefit, a shared care rider, which allows them to use each other�s benefit period, and a cost of living adjustment. We estimate the cost of this coverage to be approximately $250 per month. However, the monthly savings from canceling the life insurance policy can help offset these costs. BWFA will recommend an independent agent to Larry and Jill who will discuss these policies in greater detail.

Larry and Jill can benefit from establishing credit shelter trusts. In 2004, the federal estate tax exclusion amount is $1.5 million. That means if Larry and Jill were to die in 2004, no estate taxes would be owed. However, the sunset provision of current estate tax legislation causes the tax exclusion to revert back to $1 million in 2011. At that time, Larry and Jill�s estate will exceed the exclusion amount. We recommend establishing a credit shelter trust, which would allow $2,000,000 to pass estate-tax free. When the first spouse dies, an amount equivalent to the estate tax exclusion amount goes into the trust. During the life of the surviving spouse, income and principal, as needed, are paid to the survivor. When the second spouse dies, whatever remains in the trust passes estate-tax free to the heirs. In addition, the full estate tax exclusion amount applies to the estate of the second to die.

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At BWFA we understand that it�s difficult for people to find sound financial advice. That is why our approach is to provide straightforward solutions you can understand and act on. At BWFA you get the highest quality advice available anywhere, at any price.

We are dedicating this Special Edition of our quarterly newsletter to helping you understand what REAL financial planning is by illustrating a real-life situation. We hope you have as much fun reading it as we did writing it.

~ Saxon Birdsong, President and Director of Investments 
Part 1: The Client Profile
Part 2: Retirement and Estate Planning
Part 3: Investments
Part 4: Taxes