BUSI 489 Week 8 Comprehensive Financial Plan Example

Comprehensive Financial Plan for Daniel and Grace Whitaker

Executive Summary

Daniel and Grace, you are in a sound position overall. Your housing and debt payments are well within safe limits, you save close to 13 percent of your income, and your net worth of about $368,000 gives you a solid base at ages 42 and 40. Three issues matter most. First, your cash reserve covers less than two months of expenses, and credit card balances at nearly 23 percent are the result. Second, if either of you died or Daniel became disabled, your family would face a serious shortfall. Third, without wills, a court would choose who raises your children and how their inheritance is managed.

This plan recommends ten actions, in this order:

• 1. Adjust tax withholding and direct the extra cash, with your current surplus, to the credit cards, clearing them in about nine months.
• 2. Buy 20-year term life insurance: $600,000 on Daniel and $500,000 on Grace.
• 3. Move $10,000 from the brokerage account into savings now.
• 4. Sign wills naming guardians and a trust for the children, plus powers of attorney and health care directives.
• 5. Correct the beneficiary on Daniel's 401(k).
• 6. Reinvest the 401(k) and IRA in low-cost index funds with 75 percent stocks and 25 percent bonds, and cut company stock to 10 percent.
• 7. After the cards are paid, add disability, homeowners and umbrella coverage, and begin Grace's IRA contributions.
• 8. Raise Daniel's 401(k) contribution one point every six months until it reaches 15 percent.
• 9. When the car loan ends, raise college saving to $500 a month and add the rest to retirement.
• 10. Review the plan together every year and update the retirement projection every two years.

Why This Order

The order of the ten actions follows one principle: protect against the losses you could not recover from before reaching for gains. Credit card interest and the risk of an uninsured death or disability are threats that could undo every other part of the plan, so they come first. The estate documents cost little and protect your children from a court's decision, so they come early as well. Investment changes cost nothing but a few hours and save fees immediately. Only after those foundations are in place does the plan direct new money toward college and a larger retirement balance, because those goals have time on their side and the earlier steps make them safer.

Goals and Assumptions

Your goals, as you described them, are a six-month emergency fund, freedom from credit card debt, help with half of each child's in-state college costs, retirement when Daniel turns 62 on about 80 percent of your current take-home pay, a cash purchase of Grace's next car and an estate plan that protects your children. The plan works in today's dollars with conservative assumptions: investment returns of 4 percent above inflation before retirement and 3 percent during it, college costs rising 4 percent a year, and Social Security estimated from your statements. Tax and legal points must be confirmed each year and for Virginia law.

Where You Stand Today

Your household earns $156,000 a year, takes home about $9,140 a month after taxes, retirement deferrals and health premiums, and spends about $8,542, leaving roughly $600. You own assets of about $696,500, including a $420,000 home and $205,000 in retirement and investment accounts, against debts of about $328,800, mostly your mortgage. Your 529 plans hold $18,000.

Recommendations by Area

Cash Flow and Debt

Clearing the cards first is the highest-return investment available to you, since every dollar paid avoids nearly 23 percent interest. To keep balances from returning, the plan suggests paying cards in full each month once they are cleared and using a single card for routine spending. Track spending for the first two months with a simple app or spreadsheet; your estimate of $1,350 a month for dining, entertainment and other spending is the figure most likely to be off, and the difference will either speed or slow the plan. Lusardi et al. (2011) found that many middle-income households would struggle to raise a modest sum in an emergency; rebuilding your reserve to six months of expenses removes that risk for your family.

Taxes

Changing your withholding ends an annual refund of about $2,100 that is really a monthly loan to the government. Claiming Virginia's 529 deduction, holding bonds inside the 401(k) rather than the brokerage account, and adding Grace's deductible IRA each lower your taxes without changing your goals. Together with the 401(k) increases, these changes should reduce your federal and state income taxes by roughly $2,000 to $2,300 a year once fully in place, savings that the schedule below reinvests rather than spends.

Insurance

The life insurance recommended for each of you, about $80 a month together, is the single most important protection in this plan, because it would let the surviving parent pay off debts, keep the house, fund college and replace lost income. Supplemental disability coverage for Daniel, replacement-cost coverage on the home and contents, higher auto liability limits and a $1 million umbrella policy follow once the cards are paid. Long-term care insurance is not recommended now; the plan will revisit it when you reach your early fifties. Keep your current family health plan, whose out-of-pocket maximum your rebuilt emergency fund can absorb.

Investments and College

Your accounts should be invested as one portfolio of about 75 percent stocks and 25 percent bonds in low-cost index funds. Moving from the 401(k)'s active funds alone should save about $1,100 a year in fees. Fully funding your college goal would take about $1,000 a month; the plan instead raises 529 saving to $500 a month in three years and relies on aid, the children's work and loans for the rest, because your retirement cannot be financed later and their education can. Sell the three technology stocks in the brokerage account gradually, pairing gains with any losses, and hold a single broad index fund there instead. Keep the money for Grace's next car in savings, not investments, because it will be needed within five years.

Retirement

Retiring at 62 requires about $1.21 million in today's dollars. Your current savings should grow to about $372,500 by then, so the plan raises your saving in steps, mostly from raises and from the car payment once the loan ends. If returns or saving fall short, retiring at 64 closes much of the gap. Thaler and Benartzi (2004) showed that committing in advance to save more from future raises leads to lasting increases, which is why the 401(k) increases are scheduled now. Consider delaying Daniel's Social Security beyond full retirement age, which raises the lifetime benefit and Grace's survivor benefit, and plan for partial Roth conversions in the low-income years between retirement and the start of Social Security.

Estate

Wills that appoint Grace's sister and brother-in-law to raise the children, a testamentary trust that pays your children in stages, updated beneficiary forms that name the trust as contingent beneficiary, powers of attorney and health care directives will cost about $2,500 and should be completed this year.

Integrated Three-Year Schedule

The separate sections each asked for part of the same limited surplus. This schedule funds them in order of urgency, using about $773 a month available today (your $598 surplus plus $175 from the withholding change) and the payments that end along the way.

No phase spends more than the family actually has, which is the difference between a list of good ideas and a plan. By the end of the third year, the cards will be gone, the family fully insured, the estate documents signed, the emergency fund near its target and saving for retirement and college both rising.

Alternatives Considered

Several alternatives were weighed and set aside. Paying down the mortgage faster would save interest at 6.25 percent, but it would lock money in the house that the family may need, so it waits until the emergency fund and retirement saving are on track. Whole life insurance would build cash value but cost many times as much as term coverage for the same protection. Fully funding college now would leave retirement underfunded. Switching to a high-deductible policy funded through a health savings account brings tax advantages but more risk than thin reserves can bear. Each could make sense later, and the annual review is the time to reconsider them.

What the Plan Asks of You

A plan only works if it is carried out. The first month asks for a few hours: filing a new withholding form, applying for life insurance, scheduling the estate attorney, changing the 401(k) beneficiary and investments, and setting up automatic transfers to the credit cards and savings. After that, most of the plan runs automatically. What it asks most is patience: the first three years build a foundation, and the larger gains in retirement and college savings come after.

Monitoring the Plan

Each January, review spending against the cash flow statement, confirm insurance coverage and beneficiaries, rebalance the portfolio to its 75/25 target and confirm tax withholding. Every two years, update the retirement and college projections with actual balances. Major life events, such as a new job, a relocation, a new baby, the loss of a family member or an inheritance, also call for a fresh look. Lytton et al. (2012) describe monitoring as the step that keeps a plan alive, and Grable et al. (2012) note that clients' circumstances rarely stay as they were when a plan was written.

A Word on Stewardship

Proverbs 16:3 tells the reader to hand every undertaking over to the Lord, and then the plans will stand firm (English Standard Version Bible, 2001/2016). This plan is your work committed in that spirit: a way to care for your children, provide for your later years, keep giving generously and hold everything you have as entrusted rather than owned.

References

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Grable, J. E., Klock, D. D., & Lytton, R. H. (2012). The case approach to financial planning: Bridging the gap between theory and practice (2nd ed.). The National Underwriter Company.

Lusardi, A., Schneider, D. J., & Tufano, P. (2011). Financially fragile households: Evidence and implications. Brookings Papers on Economic Activity, 2011(1), 83-134. https://doi.org/10.1353/eca.2011.0002

Lytton, R. H., Grable, J. E., & Klock, D. D. (2012). The process of financial planning: Developing a financial plan (2nd ed.). The National Underwriter Company.

Thaler, R. H., & Benartzi, S. (2004). Save More Tomorrow: Using behavioral economics to increase employee saving. Journal of Political Economy, 112(S1), S164-S187. https://doi.org/10.1086/380085