Finc 430 and Finc 355 Project

Retirement and Estate Planning Project

(6 – 10 pages) Due Date: end of Week 7

IMPORTANT!!! I am trying to make this project relevant for the majority of the class whose primary interest is in their own retirement/estate plan (as opposed to those who are interested in becoming certified financial planners) as well as to recognize that some student’s situations are likely to be quite simple and straightforward as compared to others. Thus, this project “CAN” be based on your own personal/family (traditional or otherwise) situation, but you may want to fictionalize it with additional family members, sources of income, expense, retirement programs, etc. if necessary in order to keep it from being “TOO” simple and straightforward. In order to obtain a high grade, there needs to be some degree of complexity. In other words, it is hard to get an “A” if you are presenting a plan for a single individual who will never have a family and only relies on social security and will leave whatever is leftover to anonymous charity. On the other hand, I don’t want to see 15 page papers about multigenerational families with all sorts of trusts, family businesses and profit sharing plans etc. Also, since the exemptions for federal estate and generation skipping taxes and the unified credit are so high, and because there are only a handful of states that have meaningful if any estate taxes (and Maryland is going towards the federal exemption), some of the complexity of estate planning in the old days is no longer relevant. Don’t feel the need to jack-up your estate to make it so. There are enough other things (community property, divorce, required minimum distributions, life insurance varieties, trusts, etc., capital gains taxes …)

Length of Paper: Entire paper should be 5-10 pages including any graphs, charts, tables, etc. Premium is on quality of thoughts. I don’t want to see your monthly budget, but if mortgage or rent is a big part of it now and won’t be when you retire, then that might be relevant. The opposite with medical exp.

Use of Calculators: You may use retirement calculators found on financial advisory web sites (e.g., Charles Schwab, T.Rower Price, …) but you must provide the source and the detailed assumptions (not just cut and paste some footnotes) and explain that you understand what went in and what the results mean.

Tables/Charts: These may be helpful, but don’t include just to include. You can copy-paste a little from another calculator website, but you then need to explain it. I will take off if I can’t understand it.

Scope: This could be an individual plan, but if you have a family, whether traditional or non-traditional, it really needs to include those members of your family, including spouse, significant other, domestic partner, etc. as well as children (existing and/or planned), parents or others that you feel responsible for or for whom you care about the welfare

Inflation: You can do as you choose, but it is preferred and easier to exclude inflation and work with current dollar numbers . This means that if you make $100,000 today and need to replace 80% in retirement, that would be $80,000, even if you are ten years away. If ALSO means that any assumptions about how much of a return you will get on an investment portfolio, IRA, etc. should be “after inflation” is subtracted out. So you need to think about “REAL RETURNS” or after inflation returns. Of course, inflation will affect such things as capital gains (increases them) and makes repayment of fixed loans like mortgages easier and has complex impacts on taxes, but lets just do the best we can without too much complexity.

I. BACKGROUND INFO (1 page)

This section needs to include all of those in your family (existing or planned) including those you may need to or choose to help, including ages, health, financial situation.

· It also should include all relevant financial and legal data about the current situation of those in your plan, including

· earning potential (career, education, etc.),

· income statement (this should not be detailed, but just a couple of broad categories if relevant) and surplus/savings.

· Income Tax info if important - rates, important deductions

· Balance sheet (assets, liabilities, net worth)

· Risk Profile, including how risky is your income/job, business, investments, health

· Insurance including life (what type, whole, term, universal, …)

· Are your self employed, own a business, work more than one job, no job …

II. GOALS AND OBJECTIVES (1/2 page)

· Your goals and/or objectives need to address your strategy of when and how to retire, your lifestyle in retirement, your target estate, how you will address taxes efficiently, to whom (including charities) you want to leave your estate, in what way you want to leave your assets to others, etc.

· If you are far away from retirement, you will have many, perhaps major adjustments, along the way, but for a plan, you need to start with an initial vision.

· You need to have at least two and perhaps four goals and can have subgoals as well, but not necessary.

· Retirement Income and Wealth Goals

· Estate Planning Goals

III. RETIREMENT PLAN (3-5)

A. HOW MUCH RETIREMENT INCOME ARE YOU TARGETING? (1 - 3 page)

· What is your Target Retirement Age and your Expected/Target Situation at Retirement (Financial, Family, Demographic, Legal Situation)

· How long do you expect to live? What confidence interval? How risk averse are you to outliving your funds?

· Income and Expenses and Savings in period just prior to retirement (today’s dollars)

· Assets you expect to have or are targeting and their value at retirement (today’s dollars) Liabilities & Net Worth (today’s dollars)

· HOW MUCH RETIREMENT INCOME ARE YOU TARGETING?

· How did you Come up with the number ?

· Rule of Thumb, Reasoning based on ….

· Need to survive – basic minimum expenses

· Percentage of pre-retirement income – what percentage - justify

· Based on desired lifestyle which will differ in retirement – how?

· Assumptions on major expense and lifestyle targets

· Where will you live? What will it cost? Will it be paid off? Will you move?

· What will you need to live

Medical, Health Care and Long-Term Care

Often times medical care in retirement is one of the biggest if not single biggest expense item, so spend a little more time on how you will handle this.

· Will you have private insurance? Obama care? Cost Subsidized? Fixed plan

· Medicare A? Medicare B? What about Medigap? Prescription Medicine Plan?

· Your insurance or spouse or ….?

· How much will your needs be?

· Long-term medical care plans? Necessary? For parents, others? Insurance or not?

· Medical Power of Attorney?

B. HOW WILL YOU FUND YOUR RETIREMENT? (2-4 pages)

Where will be the Sources of your Target Retirement Income? What is your Strategy with respect to getting to that Target Income? Inheritance or gifts/trust; Social Security; Pension; Tax Advantaged and Regular Savings; work or other

1. Inheritance expected or Trust set up for you or spouse/partner: This can help meet your need for income or wealth at retirement.

2. Social Security? When will you take? What about spouse? Can you claim early on another’s?

· How much are you entitled to based on your assumptions of work and salary/wage increases (in real terms – today’s dollars) until retirement? Will you get the max? Something close to your current benefit if you don’t work anymore? You can look this up?

· If you are far away from retirement, do you discount the benefits? Or just the taxes paid in? Or the retirement age you can get?

· How much is taxable?

3. Pension, defined-benefit for you, your spouse, partner,

· What about survivor benefits?

· Is it taxable?

· Is it risky? What if company goes bankrupt? PGBC insured?

· If state or local (or federal) do you think the rules will change or feel secure?

4. Defined Contribution Plans and IRAs and Regular Savings

· How much do you need to save to fill the gap to meet your target? Can you do it?

· Can you really save that much?

· What about planned future expenses prior to retirement? Buying a house? Vacation home? Replacing a car? Paying off debt? (wouldn’t that be more efficient than saving – perhaps not, depends on tax deductions etc. and fixed rate versus inflation)? What about college for children?

· REMEMBER: If you have a fixed amount at retirement and take an annuity, say for 30 years (or purchase a life annuity even), you will not have anything left over to leave to your heirs from that pot of money. But you get a much larger amount than if you decide only to live off the income (dividends, interest). You must make the determination.

· What real rate of return (ex-inflation) do you expect to get?

· How will it be invested? Will stocks keep returning 5-8% after inflation? Will bonds keep returning 3-4% (well – not today, but in normal times)

· Mutual funds? Managed funds? municipal bonds, treasuries,

· Alternative investments? Commodities? Real estate? Hedge funds?

· You can gloss over the details of the investments but need to have a realistic view of what is possible in terms of real returns and the risk you take. Can you rely on past history for returns for your future returns?

· ROTH IRA versus Traditional IRA – taxes now versus later. Is this part of your strategy?

· WHAT ARE YOUR REQUIRED MINIMUM DISTRIBUTIONS? Will they be taxed? And How? Can you lower your RMDs?

· If you need the money, how long will it last with a constant (excluding inflation) monthly withdrawal (assume a return that excludes inflation – a real return). OR how much can you withdraw if you plan to need the money for a specified number of months? In your answers, remember to take into account whether you need to pay tax on the withdrawal or not.

· How do you plan to invest? What about taxes? Do you plan to take distributions of principal? Live only of the income? (dividends and interest?)

· Same annuity type questions that were asked for defined contribution plans and IRAs.

5. Part-Time work in retirement or self-employed or family business or real estate management

· Will you meet your goals by part-time work (perhaps even as an artist, something you don’t need to do but might be good at)

· Will you have a business that you can run (family or self) in retirement? What is the potential, the risk? Hobby or business (turn out to be non-profit).

· Will you own property that you can rent out – passively or actively manage – what are the deductions and tax implications that might be most efficient for you?

IV. ESTATE PLAN (1-3 pages)

This part of the paper should show how you will meet the goal(s)/objective(s) of your Estate Plan

A. LIST OF TARGETED ESTATE ASSETS AND WHAT WILL HAPPEN TO THEM

· Asset Classes:

· Life Insurance Cash Value

· House, Real Estate

· Business

· Tangible Personal Property

· Savings Accounts, Bonds ..Investments

· Tax-Advantaged Investments (IRAs, 401(k), 403(B), TSP…)

· What legal structures will you use to ensure these assets go to the one’s intended in your Estate Plan Goals which will be the most efficient (in terms of legal, taxes, cashflow …)

· Wills

· Trusts (type, provisions)

· POD (totten trust)

· Beneficiary/Owernship designation (who is who)

· Etc.

In terms of efficiency, you might also think in terms of the taxes, required minimum distributions, and other factors that affect the maximum enjoyment of these assets by your heirs and charities.

· Gifting Strategies

· Are gifts part of your estate plan and how will they help meet your goals

B. SURVIVOR BENEFITS AND GUARDIANSHIP

What benefits are set to accrue to your survivors (and which ones) in case of your demise . The following is just a few assets and risk mitigation (insurance) products that you might have. What about guardianship for children?

· Pensions

· Social Security

· Life Insurance