Case Studies and Results

Single Professional - Managing Debt

Kathy, age 44, is a radiologist in Taos who purchased a home in 2006 prior to the mortgage crises.  Her home was in need of repairs and obtained a second mortgage and third mortgage, one was for a new roof and the other was to upgrade the electrical.   In addition she had to borrow from her retirement plan in order to make other renovations.   She also has credit card debt, student loans and a car loan.   The burden of debt is overwhelming especially since she estimates that she purchased her home at the top of the market and the home value is less than the total outstanding mortgage debt.   Her salary is $67,000 per year and that does not include the rent she receives from her roommate.  Kathy is a hard worker and has worked extra hours to cover her debt.  She does some travel to visit her family in another state.   She also has been involved in business ventures.   She is savvy and knows that she needs to deal with her financial issues.  She does maintain a 403(b) fund and contributes to receive the maximum matching employer contribution.   Her cash flow is restricted because of the amount of debt she carries.

Step 1: What is important to Kathy?

Step 2: Financial Diagnostics

Tax Bracket: 25%

Anticipated taxes: $6,770

Contributions to 401(k) plan: $100 per pay period or $3,600 per year.    Retirement contributions are allocated to a well defined structured investment program.

Group Life Insurance: $65.000 and a universal life policy $13,000

Existing Mortgage Interest Rate: 6.0%, Current Rate: 4.5% (Home Affordable Refinance Program)

Step 3: Goals Based Recommendation

• Refinance first mortgage and pay off credit card debt. Upon payment of credit card debt,apply those payments to principal on second mortgage.
• Increase the retirement contributions from 200/mo to $500/mo as follows:
  • Half of the $205 savings on the mortgage payment should be applied to the retirement plan.
  • Upon the 403(b) loan payoff in two years, apply the 200 per monthly payments as retirement contributions.
• Make an appointment with an attorney to establish an estate plan.

Step 4: Implementation and Execution

• Set up an appointment with mortgage lender to refinance first mortgage.  Increased principal payments to pay off credit card debt. Further principal reductions on other loans will continue as each debt is paid off.
• Increased initial contributions to retirement plan.
• Opted to defer an appointment with an attorney.   Kathy will use the health care power forms provided by her employer.
• Will continue to set aside money for emergency saving.

Results:

Refinancing the mortgage provided $2,400 saving to Kathy’s mortgage payments, the term length did not change.  Kathy will have no debt by the time she retires.  Concurrently, Kathy will add to her retirement plan.   It is projected that upon retirement she will have accumulated $469,000 by the time she retires based on an assumed 5% annual return.  The first two years the cash flow will be tight, however, as debt is paid off, there should be ample surplus in her cash flow to provide more leisure spending.

DISCLAIMER

The information provided here is intended to be educational and should not be considered or construed as legal, accounting (tax), or financial planning advice. The strategies described may not be suitable for all individuals. Examples are provided for illustrative purposes only, and no representation is made that a person acting on these examples will achieve the results shown.

Although every effort has been made to assure the integrity of this material (including the reliability of websites referred to in the text), no representation or warranty is given as to accuracy or completeness. We encourage you to consult with legal and accounting professionals (as appropriate) before applying any of the strategies discussed to your particular circumstances. 

Married Couple - Planning for Retirement

Albert , age 73 and Anne, age 67 live in Las Cruces.  Albert is a painting contractor and Cynthia teaches part-time at NM State University.   Because of their transitional life from one college to another they have rented rather than purchased a home.  Home ownership did not occur until the past five years.   They were dedicated to providing for their daughter’s education.   Now they are approaching retirement and drawing on Social Security even though both are still employed.  Albert sees that, although he enjoys his profession, he finds that he is less physically able to continue painting.   Cynthia would like to retire in two years and both would love to pursue art studies and literature.    Their primary concern is a stronger retirement and to pay off debt.   They live a modest lifestyle.   Albert prepares the household tax returns.   

Step 1: What is important to Albert and Cynthia?

Step 2: Financial Diagnostics

Tax Bracket: 15% Federal and 4.9% New Mexico

Itemize:  They cannot itemize deductions

Other tax issues: They are receiving Social Security Benefits and 85% of the benefits are taxable.    Anticipated taxes: $8,044

Contributions to 403(b) plan: $200 per pay period or $3,600 per year.    Retirement contributions are allocated to 50% cash and 50% equities.   Tax savings comparison was calculated.

Met with an owner of a national tax preparation firm and ran tax scenarios on their tax software.  This determined the impact of maximizing 403(b) contributions.   In addition the tax preparer provided tax advice on Albert’s business.

Step 3: Goals Based Recommendation

• It was determined that Cynthia should maximize her contribution from $200 per pay period to 846 per pay period.  In addition their retirement asset allocation was reviewed and recommended alignment to a strategy appropriate for their stage in life.  Retirement projections were prepared and determined that Cynthia and Albert could retire in two years based on their current living standards and if she maximize her retirement contributions.
• That they prepare for the meeting with an attorney.
• That they have their financial plan available for their daughter in the event she needs to assist.
• That they utilize a tax preparation professional.
• Their budget and goals for education, travel, hobby and charity are doable.

Step 4: Implementation and Execution of Recommendations

• Cynthia increased her retirement contribution from $200 to $846 per pay period.  She also further diversified her cash position to several diversified bond strategies.   Her equities were reallocated to represent large-cap, mid-cap, small-cap, international developed and emerging market funds.  In addition a real estate trust and a commodity index fund were represented in the retirement portfolio.
• An appointment was made with a local attorney to draft their estate plan.
• Two sets of plans were provided; one for Albert and Cynthia and the other for their daughter.
• Albert will consider the tax preparer’s advice and engage their services the following tax year.
• The projects, travel, charity and seminars are budgeted.

Results:

Maximizing the 403(b) contribution will enable Cynthia and Albert to save $4,380 in taxes.  In addition, the 403(b) contributions will add $44,000 of principal to their retirement balance over the next two years.  The advice of the tax preparer will also save them an additional $1,000 in taxes.   Their attorney completed the estate plan.   Also they are preparing for their trip to France and they have completed the garden arbor.  Finally, they know that their budget will allow for charity and seminars.   

DISCLAIMER

The information provided here is intended to be educational and should not be considered or construed as legal, accounting (tax), or financial planning advice. The strategies described may not be suitable for all individuals. Examples are provided for illustrative purposes only, and no representation is made that a person acting on these examples will achieve the results shown.

Although every effort has been made to assure the integrity of this material (including the reliability of websites referred to in the text), no representation or warranty is given as to accuracy or completeness. We encourage you to consult with legal and accounting professionals (as appropriate) before applying any of the strategies discussed to your particular circumstances.  

Married Couple - Managing Proceeds from a Sale

Michael , age 61 and Anne, age 58 live in Albuquerque.  Michael works at a major laboratory and Anne teaches music part-time at a local high school.  Anne’s family large owns a large concrete company in San Diego of which she owned a partial interest.   Her siblings purchased her share which amounted to around $7,000,000 and she has kept part of the money in cash.    Since the housing market in California has severely declined, Anne wants to make set aside ample reserves to help her family’s business weather through the difficult time.   One of the concerns is that monies have been spread to various banks in Albuquerque and much of it is uninsured.  In addition there is not a structure to provide for bond investments.  Michael and Anne are self-sufficient from their employment salary and do not rely on either the income or principal of the family business proceeds.  Preservation of the business proceeds is important; however they appreciate the need for equity investments to provide diversification and to stay ahead of inflation.  They hold no debt and are able to cover the educational expenses of their sons.

Step 1: What is important to Michael and Anne?

Step 2: Financial Diagnostics

Tax Bracket: 33% Anticipated taxes: $40,000

Contributions to 401(k) plan: $100 per pay period or $3,600 per year.    Retirement contributions are allocated to a conservative fixed income program. 

Step 3: Goals Based Recommendation

• It was determined that $2,000,000 should be set aside to either lend or invest in the family concrete business.
• Invest the remaining proceeds in an asset allocation strategy
• Make an appointment with an attorney to establish an estate plan.
• Increase the contribution to their company retirement plan.

Step 4: Implementation and Execution of Recommendations

• Of the $2,000,000 set aside as an emergency reserve for the family business, Michael and Anne felt it would be best to establish a mini bond ladder that did not extend beyond a three year term.
• Michael and Anne met with their investment advisors to implement a coordinated asset allocation strategy.   Therefore they divided up the assets to provided a combined  50% bond/50% equity split.   This consisted of municipals, cds, on a bond ladder that does not exceed 12 years.   The equities were managed among large-cap, mid-cap, small-cap, international developed and emerging markets.  Other positions included real estate trusts and a commodity index.
• They met with an attorney specializing in estate planning.  This attorney established irrevocable life insurance trust to provide for estate taxes.
• Michael met with the human resources to increase his contribution to his retirement plan.

Results:

Restructuring the investment program increased their investment income from $50,000 to $200,000.  Much of the income was from tax free municipal bonds and reduced taxes on qualified dividends.  They did realize an increase in their tax bracket, but that was manageable.   The estate plan is now in place and they are prepared for the various tax changes that could come about.

DISCLAIMER

The information provided here is intended to be educational and should not be considered or construed as legal, accounting (tax), or financial planning advice. The strategies described may not be suitable for all individuals. Examples are provided for illustrative purposes only, and no representation is made that a person acting on these examples will achieve the results shown.

Although every effort has been made to assure the integrity of this material (including the reliability of websites referred to in the text), no representation or warranty is given as to accuracy or completeness. We encourage you to consult with legal and accounting professionals (as appropriate) before applying any of the strategies discussed to your particular circumstances.  

Single Individual - Pursuing an MBA

Miguel, age 28, is a research analyst for an American company that has an office in Madrid, Spain.  He is single and no dependents.  Miguel desires to obtain his MBA at a top-tier business school.  His educational endeavor will be a major expense.  Although Miguel is an American citizen, he pays both US and Spanish taxes and participates in the Spanish health care and retirement programs.  Miguel monitors his income and spending.  He also sets aside savings for investments as well as contributes to his retirement plans.

Step 1: What is important to Miguel?

Step 2: Financial Diagnostics

Bracket: 29.7% (Foreign Tax Bracket)   Anticipated taxes: $13,283

Contributions to retirement plan: $308 per pay period or $7,380 per year.    Retirement contributions are allocated to a well defined structured investment program.

Step 3: Goals Based Recommendation

• Review Business Schools – It was noted studies comparing income between attending a top-tiered MBA program and a lower MBA program over 20 years.  In addition the costs were reviewed below:

  School	2012-2013
  	Tuition	Fees	Health	Boarding	Other	Total
  Harvard University	56,175	958	3,148	13,752	20,777	94,810
  MIT (Sloan)	58,200	2,046	5,250	18,757	4,696	88,949
  Columbia University	60,720	4,205	3,186	20,700	4,590	93,401
  University of Pennsylvania - Wharton	59,736	5,092	3,430	22,496	6,327	97,081
  Stanford University	59,550	4,751	4,491	24,087	987	93,866
  University of California - Berkeley*	26,158	828	1,153	20,000		48,139
  Dartmouth College (Tuck)	58,935	5,630	13,260	12,375		90,200
  New York University (Stern)	56,554	1,960		24,472	1,140	84,126

• Educational Funding Sources – Miguel will need to draw from the following to finance his MBA
  • Miguel has saving in the amount of $46,000
  • Miguel has retirement savings with a provision that he can draw without penalty provided it is used to fund education
  • Miguel will still need to rely on student loan ranging from 6.8% to 7.9% interest rates.  However the above savings will reduce the reliance on such loans.
• Funding Source and Outlay – A plan was made to determine on when and how to draw on the mentioned resources to reduce the tax impact and the amount of loans necessary to finance his MBA.
• Loan Balance and Monthly Payment – A projection was made to determine what his student loan payment obligations will be after he obtains his MBA

Step 4: Implementation and Execution of Recommendations

• Miguel worked with his accountant to run a mock tax preparation to make sure there were no tax surprises in both foreign and US taxes. This plan was submitted as part of his application to one of the above MBA programs on how he intends to finance his education.

Results:

Miguel was accepted to the MBA of his choice and will be beginning the program in the Fall of 2014.

DISCLAIMER

The information provided here is intended to be educational and should not be considered or construed as legal, accounting (tax), or financial planning advice. The strategies described may not be suitable for all individuals. Examples are provided for illustrative purposes only, and no representation is made that a person acting on these examples will achieve the results shown.

Although every effort has been made to assure the integrity of this material (including the reliability of websites referred to in the text), no representation or warranty is given as to accuracy or completeness. We encourage you to consult with legal and accounting professionals (as appropriate) before applying any of the strategies discussed to your particular circumstances.