Case Study: The Johnson Family & Berno Financial Management
At age 58, Bob Johnson accepted an early retirement package after 35 years at P&G.
Personally, he and his wife Sally will celebrate their 30th anniversary and have 3 children. Their oldest child, Tom, lives in California and is married with two children. He is a physician. Their second child, Beth, is single and works in pharmaceutical sales. She recently became engaged. Their third child, Katie, is a junior in college studying to be a teacher. Between his wife, children grandchildren and volunteer opportunities at his church that he wants to pursue it looks like there is more than enough things to do with his free time.
Bob held a variety of management positions during his time at P&G. He has relied on Procter's employee benefit plans for his financial security and has never seen the need to work with any type of financial advisor.
He used an attorney several years ago to draft simple Last Will and Testament documents for he and his wife but he has not consulted the attorney for many years.
Bob has always had an interest in investing and enjoyed managing his family's investments within the P&G Profit Sharing Trust Plan (PST). He chose to use Retirement Plus options for the 401(k) Savings Plan portion of the P&G PST. But now he realizes there is a large dollar amount at stake and he feels less confident in his ability to continue managing the complexity of his finances all alone. He feels now is the time to hire a professional financial advisor to serve him and his wife during retirement.
Before Bob retired, he attended several retirement seminars sponsored by brokerage firms and banks. Having never worked with any type of financial professional he was unsure of the best way to evaluate them. While he was impressed with their knowledge and strategies, he could sense that they were mass-producing financial plans for P&G employees in high volume.
Also with all of the recent issues that are prevalent with large institutions he was concerned with both the integrity and the financial stability of the brokerage firms and banks. Additionally he saw a conflict of interest in the way they created financial products and earned their fees and compensation to sell those products.
With all of the time and effort he saw these firms putting into their marketing, he wondered how they served their existing clients and he was concerned about what kind of attention or service he would get in the years ahead.
He thought they put too much emphasis on strategies to minimize income tax in the initial transition to retirement and not enough emphasis on how to manage the annual cash flow needs in retirement on a regular basis.
Through a detailed, written Personal Financial Assessment with a Berno Financial Management advisor, Bob and Sally identified the following personal financial planning goals. They need $7,500 a month after taxes for their base personal living expenses. They have 10 years remaining on their mortgage with a monthly payment of $1,500. They want to spend $25,000 this year on a special 30 year wedding anniversary trip. They expect to spend $30,000 on their daughter's wedding in 2010. They both have relatively new cars, but project replacing Bob's in 2012 for $35,000 and Sally's in 2014 for $35,000. Their home is 25 years old and they anticipate spending $10,000 for some home maintenance projects in 2011 and about the same every 5 years thereafter. They plan on living in their current home as long as they can. They want to allocate $12,000 a year for travel above and beyond their normal monthly expenses. Sally is active in her college alumni association and wants to pledge $5,000 a year for 5 years beginning in 2009 for her alma mater's capital campaign. They want to plan a wedding for their youngest daughter, Katie, 5 years or so in the future. They do not plan to contribute to their grandchildren's education expenses but hope to leave a nice inheritance for their children to use as they see fit.
Based on further questions asked by their financial advisor and extensive discussion and consideration, they have identified some personal financial planning concerns. Bob had a heart attack 5 years ago and none of the men in his family have lived past age 75. Sally, on the other hand, is in good health and has longevity in her family. Her mother is in good health at 88 and her grandmother and aunts all lived into their 90's. Sally is concerned about long-term care costs for her if Bob pre-deceases her and she lives to age 95 or 100. They are concerned about protecting any inheritance that their son, Tom, would receive if he is sued for medical malpractice. They are concerned about their future son-in-law's financial responsibility and want to protect Beth's inheritance from any creditors or a divorce. They both want to leave a charitable bequest to their church in their estate plan.
Bob has $4,000,000 in his P&G PST. He used Retirement Plus choices for his Savings Plan balance of $75,000. He shifted $300,000 of the plan balance to the Stable Value Fund in 2007 in anticipation of his retirement. The balance of the plan remains in P&G stock. He has $500,000 of stock options remaining that expire in years ranging from 2012 to 2018 or up to age 67. He has 100,000 of P&G stock in his SIP account. He used his STAR Awards for the past several years to pay college expenses for his children and he used an inheritance that he received for a major home remodeling project. He does not have any taxable accounts, non-IRA investments. Sally has not worked outside of the home while they have been married and does not have any retirement or pension benefits. She may receive an inheritance in the $250,000 range but does not want to count on it.
Bob & Sally's financial advisor used a written personal financial profile based on academic, psychographic principles to determine investor return expectations, behavior and risk tolerance. This process produces a test score that is measured on a bell curve to determine an appropriate asset allocation between stocks, bonds and cash for their investments. Tom's score was a 54 and Sally's score was a 58 which placed them in Group 5 with a recommended asset allocation of 60% stocks, 30% bonds and 10% cash. Tom and Sally's financial advisor devoted two meeting sessions to a Client Investment Education process and based on further discussions and consideration of the P&G stock options, they decided to set the initial stock, bond and cash allocation for the retirement plan at 50% stocks, 45% bonds and 5% cash. Bob did not want to keep 40% of his PST balance in P&G stock, so they will open an IRA roll-over account.
Cash Flow is King
Cash flow is king in the opinion of Bob and Sally's financial advisor, so he prepared a detailed written comprehensive retirement projection with a year-by-year strategy to generate the cash necessary from Bob's SIP plan, stock options and new IRA roll-over account to meet each of their identified personal financial planning goals over the next several years. This plan will be monitored and tracked annually and updated every 3 to 5 years to adjust for any changes, current market conditions and investment returns.
To minimize income taxes, the plan includes transferring some of the P&G stock from the PST in shares to Bob's SIP since employer stock in an employer retirement qualifies for a special tax code provision that only taxes the cost basis or original value of the company stock, not the current market value. Since much of Bob's P&G Preferred stock has a cost basis of $6.74 per share compared to current market value of over $60 per share, this gives Bob a lot of flexibility to meet the special one-time expenses they will be incurring over the next few years. This concept, referred to as Net Unrealized Appreciation stock or NUA, is particularly attractive for funding Sally's charitable gift to her college.
Sally wants to feel comfortable that the investment portfolio has a high probability of lasting until she is 100 years old, so the initial withdrawal rate in the early years will be limited to 3% to 5% of the portfolio. Bob also decided to defer starting his Social Security from age 62 to age 66 since the exercise of stock options will keep him in a high tax bracket for several years. More importantly, by deferring his Social Security start date to his Normal Retirement Age, as defined by Social Security, their initial benefits will be higher than starting early at age 62, which will allow for higher annual dollar amounts of inflation adjustments and a higher survivor benefit for Sally if Tom pre-deceases her.
Doing this year by year planning showed that their mortgage will be paid off in the same year that their last P&G stock option expires and Social Security starts, so their monthly living expenses will actually go down and their IRA roll-over account withdrawal rate within a reasonable range to keep the portfolio in tact until Sally reaches 100 years of age and hopefully will provide for some inheritance balance.
To further reduce the risk of outliving their money, they purchased long-term care insurance for Sally. They felt comfortable not buying any for Bob due to his health and family history. To keep the premiums affordable, they purchased coverage for about three-fourths of the actual projected cost of long-term care on the premise that long-term care insurance would supplement the investment portfolio. This way they hedge their bets by saving some premium expense if the coverage is not needed.
How will you best achieve financial peace of mind?
To learn more about how Berno Financial Management can help you achieve financial peace of mind, contact us for a free, no obligation copy of our Personal Financial Assessment for Procter & Gamble Employees and Retirees. |