Financial Plan Final

A Financial Plan for

Frank and Madelyn Stuart

12/20/2014

Prepared by:

Anthony J. Licocci

AJL Investment Advisors

Table of Contents

Page #

Explanation of Financial Planning Process 3

Letter of Engagement 4-5

Contact Information 6

Disclaimer 7

Executive Summary 7

Economic Assumptions 8

Financial Goals 8

Statement of Cash Flows 9

Statement of Financial Position 10

Emergency Reserves 11

Insurance Planning 12-15

Income Tax Planning 15

Home Mortgage 16-17

Retirement Funding 18-20

Education Funding 21-22

Investment Strategy 23-24

Inheritance Strategy 24

Estate Planning 25

Other Considerations 26

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Explanation of Financial Planning Process

Establish and Define our relationship: In this step we fully explain the services to be provided, how we are compensated, and any sources of compensation. We will also discuss each of our expectations regarding the roles we will have during the personal financial planning process. We will clarify how decisions will be made and we will discuss the duration of the relationship.

Gather information: Set goals and expectations: Here, we gather your financial information and other data needed to create your personal financial plan. We will also indentify and prioritize your financial goals.

Analyze and Evaluate your current financial status: Next, we identify your financial strengths and opportunities in preparation of making recommendations.

Develop and Communicate recommendations and alternatives: Once we determine your financial status, a financial plan is prepared. The plan is customized with recommendations based on your needs, goals and objectives. We will meet with you to discuss your recommendations and various alternatives available to meet your financial goals and objectives.

Implement the recommendations: A financial plan is only helpful if action is taken on the recommendations provided. We will assist you with either implementing the recommendations or coordinating their implementation with other licensed professionals.

Monitor the recommendations: As time passes your financial and family circumstances may change. Current economic conditions may also change. We will provide periodic reviews of your financial plan at agreed upon intervals to ensure that you remain on track to achieve your financial goals.

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Letter of Engagement

Dear Mr. and Mrs. Stuart,

Thank you for the opportunity to meet with you. I welcome the opportunity to work with you as your financial planner. This engagement letter outlines the specific terms of the financial planning engagement between:

Anthony J. Licocci CERTIFIED FINANCIAL PLANNER™, Frank Stuart and Madelyn Stuart

If the scope or terms of the financial planning engagement change, they should be documented in writing and mutually agreed upon by all parties to the engagement.

Please be assured that all information that you provide will be kept strictly confidential. During the financial planning engagement, I may, on occasion, be required to consult with other third party professionals at which time I will obtain your written permission to disclose your personal information.

As discussed during our introductory meeting, this engagement will include all services required to develop a comprehensive financial plan. These services will specifically include:

Reviewing and prioritizing your goals and objectives. Developing a summary of your current financial situation, including a net worth

statement, cash flow summary, and insurance analysis. Reviewing your current investment portfolio and developing and asset management

strategy. Completing a retirement planning assessment, including financial projections of assets

required at estimated retirement date. Completing an education funding assessment, including financial projections of assets

required at the time your children attend college. Identifying tax planning strategies to optimize financial position. Presenting a written financial plan that will be reviewed in detail with you. It will contain

recommendations designed to meet your stated goals and objectives, supported by relevant financial rational.

Developing an action plan to implement the agreed upon recommendations. Referral to other professionals, as required to assist with implementation of the action

plan. Assisting you with the implementation of the financial plan. Determining necessity to revise your financial plan.

This will be an ongoing professional relationship. At a minimum we will meet on an annual basis to ensure the plan is still appropriate for you. Either party may terminate this agreement by notifying the other in writing. Any fees incurred prior to the date of termination will be payable in full.

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My services will be charged on a flat-fee basis. We agreed on a fee of $1,000 for the first year of service. This includes the development and delivery of your financial plan, unlimited email communication and a review meeting in June 2015. Please provide a check for $500 with a signed copy of this engagement letter. An additional $500 will be billed at the end of February 2015. You agree to pay any outstanding charges in full within 15 days of billing. Please make checks payable to AJL Investment Advisors.

Please be advised that I do not receive a referral fee from any other professionals to whom I may refer you.

In order to ensure that the financial plan contains sound and appropriate recommendations, it is your responsibility to provide complete and accurate information regarding pertinent aspects of you personal and financial situation including: objectives, needs and values, investment statements, tax returns, copies of wills, powers of attorney, insurance policies, employment benefits, retirement benefits and relevant legal agreements. This is not all-inclusive and any other relevant information should be disclosed in a timely manner. It is your responsibility to ensure that any material changes should be disclosed to the above noted circumstances are disclosed to me as your financial planner on a timely basis since they could impact the financial planning recommendations.

I have no known conflicts of interest in the acceptance of this engagement. I commit that I will advise you of any conflicts of interest, in writing, if they should arise.

I acknowledge my responsibility to adhere to the CFP Board’s Standards of Professional Conduct, and all applicable federal and state rules and regulations. At all times during the engagement, I shall place your interests ahead of my own when providing professional services. In addition, since the engagement includes financial planning services, I am required to act as a fiduciary, as defined by the CFP Board. You can learn more about the CFP Board’s ethical requirements at www.CFP.net

I look forward to working with you and helping you reach your financial goals.

Sincerely,

Anthony J. Licocci CFP® Professional Frank and Madelyn StuartI accept the terms of this engagement letter: I accept the terms of this engagement letter:

Anthony J. Licocci Frank Stuart

Madelyn Stuart

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http://www.CFP.net/

Contact Information

Contact Name Anthony J. LicocciTitle CERTIFIED FINANCIAL PLANNER™Address 1018 Desert Trail RdCity/State/Zip Scottsdale AZ 85260Office # (480) 555 - 3900Fax # (480) 555 - 3901 Email [email protected]

Client Names Frank & Madelyn StuartAddress 18345 W. Mission LaneCity/State/Zip Waddell AZ 85355Home # (623) 555 - 1200Cell # (623) 555 - 1201Email [email protected]

Family Information

DOB Frank 08/30/1979 Madelyn 10/11/1979Marital Status MarriedChildren Blake age 7 Lisa age 5

Employment Information

George MadelynOccupation Doctor Homemaker/NurseEmployer Lakeside Hospital Not employedAnnual Salary $170,000 $4,000 (online sales)

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Disclaimer

This plan provides a general overview of some aspects of your personal financial position. It is designed to provide educational and/or general information and is not intended to provide specific legal, accounting, tax or other professional advice. For specific advice on these aspects of your overall financial plan, you should consult with your professional advisors. Asset or portfolio earnings and/or returns shown or used in the plan are not intended to neither predict nor guarantee the actual results of any investments products or particular investment style.

IMPORTANT: The projections or other information generated in this report regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Additionally, it is important to note that the information in this report is based upon financial information input on the date above; results provided may vary over time and with subsequent uses.

Executive Summary

Frank and Madelyn, you are a high income family with two young children. Your major financial goals are retirement and educating your children. I have prepared your analysis and have highlighted your strengths and areas of opportunity below.

Strengths Opportunities

-High Income (Frank) -Inadequate Cash Reserve-Well Defined Financial Goals -Savings needed for Retirement-Positive Cash Flow -Savings needed for Education-Positive Net Worth -Lack of Estate Planning documents-Stable Employment (Frank)-Starting a New Business (Madelyn)-Large Inheritance Pending

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Economic Assumptions

-Inflation: 3% on average-College Expenses: increasing at 5% annually-After Tax Rate of Return: 9% on average-Frank’s Salary: increasing at 4% annually-Federal Income Tax bracket: 25%-State Income Tax Bracket: 6%-15 year fixed mortgage rate: 7%-30 year fixed mortgage rate: 7.5%-Refinancing costs: 3%

Financial Goals

-Provide college education funds of $25,000/year (in today’s dollars) for both Blake and Lisa.

-Pay off mortgage by the time Frank is 55 years old (20 years)

-Plan for retirement when Frank is 67 years old, replacing 70% of Frank’s pre retirement salary and including Social Security benefits for both Frank and Madelyn.

-Review of all insurance coverages determining if any additional coverage is needed.

-Establish funding to ensure Lisa’s medical care is paid in full including deductibles and other out of pocket funding.

-Assist Frank’s parents in their retirement years, as needed

-Maintain adequate emergency reserves equal to 6 months of living expenses.

-Prepare proper wills and estate plan.

-Create investment portfolio that will generate a target rate of return of 9% within their risk tolerance to meet the retirement and education objectives.

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Statement of Cash FlowsFrank and Madelyn Stuart

For Year End December 31, 2013

CASH INFLOWS:-Salary (Frank) $170,000-Gift (Frank’s Parents) 20,000-Self Employment Income (Madelyn) 4,000-Interest 900

TOTAL INFLOWS $194,000

CASH OUTFLOWS:-Section 401(k) plan contribution $11,900-Mortgage Payment (P&I) 20,700-Property Tax (Residence) 1,800-FICA and Self Employment Tax 9,514-Federal Income Tax Withholding 68,000-State Income Tax Withholding 6,734-Utilities 3,980-Disability Insurance Premiums 900-Homeowners Insurance Premium 2,000-Auto Loans 10,789-Auto Expense and Maintenance 1,200-Auto Insurance Premium 2,400-Housekeeping Service 2,400-Education Loans 6,915-Clothing and Dry Cleaning 5,600-Food 5,750-Entertainment 3,970-Miscellaneous 5,998

TOTAL OUTFLOWS $170,550

TOTAL CASH SURPLUS $24,350

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STATEMENT OF FINANCIAL POSITONFrank and Madelyn Stuart

January 1, 2014

Assets 1 Liabilities and Net WorthCash/Cash Equivalents: Liabilities:-Checking Account (JT) $2,500 -Credit Card Balances $550-Money Market3 (JT) 5,000 -Auto Loan (Audi) 25,000

-Auto Loan (Toyota) 18,000Total Cash/Cash Equivalents $7,500 -Home Mortgage 225,000

-Student Loans 50,500Invested Assets:-CD (JT) $15,000 Total Liabilities $319,050-Section 401k Plan (F) 18,000-Cash Value Life Ins. (M) 6,000-Coin Collection (F) 10,000

Total Invested Assets $49,000 Net Worth $81,950

Personal Use Assets:-House4 (Appraised 7/1/13) (JT) $275,000-Auto (Toyota) (JT) 22,500-Auto (Audi) (JT) 47,000

Total Personal Use $344,500Total Assets $401,000 Total Liabilities and Net Worth $401,000

Note to financial statements:1 Assets are stated at fair market value2 Liabilities are stated at principal only and are all joint obligations except the student loans which belong to Frank3 The money market account is currently serving as their emergency fund4 Land value was determined to be $50,000 and the home value $225,000. Replacement value of the home is also $225,000

Title Designations:JT = Joint Tenancy with Right of SurvivorshipF = Frank’s separate propertyM = Madelyn’s separate property

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Emergency Reserves Recommendation

Frank and Madelyn you have expressed the desire to keep six months of living expenses on hand as a cash reserve. A rule of thumb for someone who is married and only one spouse is employed outside of the home is to keep six months of fixed and variable expenses in the form of a cash reserve. I agree with your desire to have six months living expenses on hand and I recommend setting aside funds in an account that is highly liquid and relatively safe. For this reason I would recommend either using a money market deposit account or a money market mutual fund account.

A money market deposit account is a very safe and highly liquid account that is FDIC insured. This account would require a minimum balance and would offer limited check writing privileges. A money market mutual fund account is a fund that is not FDIC insured but invests in high quality, short term investments such as T-Bills, commercial paper, and negotiable CDs. It is designed to maintain a Net Asset Value (NAV) of $1.00 per share and not fluctuate either up or down in value. Funds can be withdrawn at any time without penalty and this is usually done by writing a check. Both options are considered highly liquid and safe investments and because you have already established a money market account I would suggest continuing to use this account for your emergency reserves.

Based on your current fixed and variable living expenses I have calculated that you will need to keep $37,200 on hand for your emergency reserve plus the cost for Lisa’s surgeries for a total of $52,200. This was calculated by taking your total cash outflows and subtracting out employment taxes (FICA, Federal and State Income taxes) and your 401k plan contributions because these expenses would not be present in the event Frank was unemployed. This indicated the total amount of fixed and variable living expenses for last year. The next step was to divide the updated total expense in half to represent half a year or 6 months of living expenses. I have included the actual figures and calculation below.

You currently have $5,000 set aside as your cash reserve in your money market account, I am recommending to continue using this money market for you emergency reserve. I would fund your emergency reserve as soon as possible; the emergency reserve is considered the foundation to any financial plan. Based on your current cash flow it could take 4-5 years to reasonably save for an adequate cash reserve which is too much time. I am recommending using the funds from the $15,000 CD, when it matures, and the remainder coming from Madelyn’s parent’s estate to get this objective accomplished quickly.

Total Annual Outflows $170,550Less: FICA, Federal and State Tax - 84,248Less: 401k contribution - 11,900TOTAL $ 74,402Per month $ 6,2006 month emergency reserve $ 37,200

Lisa’s Surgery Expenses $ 15,000

Total Emergency Reserve $ 52,200

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Insurance Planning

Frank and Madelyn, I have reviewed all of your current insurance policies and have made recommendations for each type below.

Health Insurance:To summarize your current health insurance coverage you have a Preferred Provider Organization (PPO) plan with an individual deductible of $1,000/yr, a family deductible of $2,000/yr, annual stop-loss limit of $5,000 and an 80/20 coinsurance clause for in-network providers. This coverage is provided by Lakeside Hospital for the benefit of your immediate family. All medical plans have a break point or a dollar amount of covered expenses after which the insurer pays 100% of the maximum limitation of the policy. The individual break point for your plan is $6,000 ($1,000 deductible + $5,000 stop loss) and a family break point of $7,000 ($2,000 deductible + $5,000 stop loss). After following up with you, you have indicated that Lisa expects to have 5 more surgeries to correct her physical disabilities with a cost of $20,000 per surgery. The good news is that even with all 5 surgeries being completed in different years your insurance plan will cover most of the cost. You have provided me additional information from your medical provider and they are estimating your out of pocket expense to be anywhere from $10,000 to $15,000. I would recommend increasing your cash reserve by this amount to be able to pay for the surgeries and still protect your family from any other emergencies that may occur.

Dental and Vision: This is an insurance plan that is not currently offered by your employer. Dental insurance can cover routine costs of going to the dentist as well as offsetting some of the cost for more expensive procedures. Vision Insurance can cover the costs of eye exams, glasses, contact lenses and other services. According to your list of expenses you are not spending any money on these services at this time. If anything changes regarding these services we may need to look into acquiring some coverage for both of these services. As of now any emergency for dental or vision care would have to be paid out of your emergency reserve.

Disability Insurance: -Frank current coverage: American Medical Association, Own Occupation, 60% of Gross Pay, Elimination Period 180 days, Benefit Period 60 months, Residual Disability Benefit rider, Guaranteed Renewable.Overall I think this policy provides the coverage you would need but I do have a couple of concerns with some of the features. The elimination period would start payments 180 days after becoming disabled which means that your cash reserve would have to cover your family’s expenses for 6 months. If you delay funding your cash reserve you may want to reduce your elimination period to 90 days or less on this policy. Also your current policy will only pay out a benefit for 60 months and nothing after that which means that you would have to find another source of employment if still unable to perform your duties as a physician. You could look into extending your policy coverage until the normal retirement age which would increase your premiums on this policy but would prevent having to use other assets set aside for other goals to cover living expenses. I would recommend extending the coverage period out to

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normal retirement age and adding a future increase option rider. The future increase option rider would increase your benefit as you get older and as your income increases each year. These two updates can ensure that you will not have to change the goals and objectives you have because you were disabled for a period of time. The additional policy premiums will be paid from the additional cash flow from adjusting Frank’s federal tax withholding.-Madelyn you currently do not have any disability coverage. As your business starts to produce more income, as expected, you will want to purchase a policy to protect your income. I don’t feel that this is something that needs to be purchased this year but we will continue to monitor your coverage need on a regular basis.

Malpractice Insurance: Frank you are provided this coverage through your employer for work at the hospital and at the clinic. No additional coverage is needed at this time.

Homeowners Insurance:Your current homeowner’s policy is a HO-3 open perils policy with a personal property endorsement and has a $500 deductible. Based on your home replacement cost the minimum amount of coverage that needs to be carried is $180,000 ($225,000 X 80%). This amount of coverage would ensure that any damages would be fully covered less your deductible. The personal property endorsement would also protect your personal property as replacement cost rather than actual cash value which is a depreciated amount. If you were to raise your deductible to $1,000 this would lower your premiums and free up additional cash flow.

Automobile Insurance: Looking at your auto insurance coverage you are fully covered in the event of an accident. Your deductibles are $500 comprehensive and $1,000 collision. If the damage to your auto is caused by striking another vehicle or object you will have to pay for the repairs, up to $1,000, out of your cash reserve. If the damage is viewed to be caused by something that is out of the driver’s control you will have to pay for the repairs, up to $500, out of your cash reserve. If you would like to reduce the out of pocket expense caused by any accident then you may want to lower you deductibles but this would increase the policy premium.

Personal Umbrella Liability Policy:Your current homeowners and auto policies will pay for claims up to certain limits. A personal umbrella policy (PUP) would pay for any liability beyond your policy limits up to the PUP limit. This policy would further protect your interests in the event of an accident either at home or in your vehicle. I would recommend purchasing a personal umbrella liability policy to provide protection beyond your current home and auto limits. The policy premiums will be paid from the additional cash flow from adjusting Frank’s federal tax withholding.

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Life Insurance:-Frank you currently have $50,000 in group term life insurance that is paid for by your employer. You have asked me to review the amount of insurance needed to protect your family if you were to pass away unexpectedly. The method used to determine this amount is called the Human Life Value method which looks at your lifetime earnings less taxes on those earnings and your personal consumption amount. The assumptions I used were your $170,000 salary, 32 years until retirement, state and federal taxes of 31% and a consumption rate of 15%. Based on these assumptions I have calculated your life insurance need to be $2,427,747. You currently have $50,000 of coverage which would make your life insurance need to be $2,377,747. In order to cover this amount of insurance needed I would recommend using a combination of term and permanent life insurance. Term insurance will provide protection for a specified period of time, is the most affordable and will provide the maximum amount of coverage per total of premium dollars expended. Permanent life insurance will be in place when you pass away as long as adequate premiums have been paid. Along with a death benefit these polices also have cash value that can be borrowed or possibly withdrawn to fund your retirement and education goals. -I am recommending a 30 year level term with a $2,000,000 death benefit. There is no guarantee that you will ever collect on this policy but it would ensure that if you were to pass away unexpectedly during your working years your family would be taken care of. For the remaining coverage needed I would recommend a permanent life insurance policy called Universal Life (UL). The Universal Life policy will give you the ability to adjust the premiums, death benefit, and cash value to meet your financial goals. This flexibility will be beneficial because you are young and as time goes on your goals, objectives and needs may change. This policy will also require lower monthly premium payments compared to a Variable Universal Life and based on your current cash flow I feel this policy would be the best policy to start with. The two policies combined will cover your current needs in the most cost effective manner. We will continue to monitor and review your polices as we meet in the future. I have run both policy illustrations to show you in detail how each policy functions which we will discuss in our meeting. I have included the human life calculation below. The policy premiums will be paid from the additional cash flow from adjusting Frank’s federal tax withholding.-Madelyn you currently have a $10,000 whole life policy that is paid up. As you start to earn more income from your business you will need to increase your coverage. If you were to pass away unexpectedly your family’s expenses could increase depending on your plans for child care. I am recommending purchasing a Level Term life insurance policy to cover any gaps in your insurance planning. In a follow up conversation you indicated that you would feel comfortable looking at death benefit of $250,000 and a time frame of 15 years. This time frame would insure you up to the point of Blake’s 2nd year of college and Lisa finishing high school. The death benefit would help with paying for any added expenses especially while the children are young and as your family adjusts to life without you. I have run a policy illustration that we will look at in our meeting and your coverage is something that we will monitor on a regular basis. The policy premiums will be paid from the additional cash flow from adjusting Frank’s federal tax withholding.

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Frank’s Human Life Value Calculation:Step 1 Step 2$170,000 X (1-.31) = $117,000 X (1- .15) = $99,705 Retirement Age 67

Current Age -35Yrs until retirement 32

Step 3 Step 4 Step 5PV= $0 PV= $2,427,747.19 PV needed today $2,427,747.19FV= $6,251,649.93 FV= $6,251,649.93 Current insurance 50,000.00PMT= $99,705 PMT= $0 INS need today $2,377,747.19N= 32 N= 32I= 4 I= 3

Tax Planning Recommendation

Frank and Madelyn, the most important piece of your tax planning this year is the amount that you are withholding from your paychecks. Your tax withholding election can make a difference in the amount of funds you have available to save for other goals. Adjustments to your withholding through your employer can make sure you are withholding enough taxes to satisfy your federal and state requirements. Based on your married filing jointly status and your current income you are in the 25% federal income tax bracket and 6% state income tax bracket. Adjusting your tax withholding to a point where you are having 25% federal tax and 6% state tax withheld could free up additional cash flow per month that could be applied to the other goals you have. For example you should be withholding 25% federally or $42,500 ($170,000 x .25) you are currently withholding 40% or $68,000 ($170,000 x .40) that is a difference of $25,500 per year or $2,125 per month. You are underfunding your state withholding it should be 6% or $10,200 ($170,000 X .06) you are currently withholding 4% or $6,734 ($170,000 x .0396) which is a difference of $3,466 per year or $289 per month. By adjusting your withholding amount you could free up $22,034 per year or $1,836 per month. I am recommending that you adjust your withholding to 25% for federal income tax and 6% for state income tax to free up additional funds that can be used for your saving goals and objectives.-In regards to the preparation of your taxes you will be able to adjust your Adjusted Gross Income (AGI) by one half of Madelyn’s self-employment tax paid which is the employer portion. You also want to make sure you are itemizing your deductions. Expenses that can be deducted from your AGI this year include:

-Mortgage Interest ($20,700)-Property Taxes ($1,800)

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These amounts total more than your standard deduction for married filing jointly $12,400 which is why you should itemize your deductions. Your tax situation is something that will be reviewed on a regular basis, especially when Madelyn starts to generate more income from her business as expected.

Home Mortgage Recommendation

Frank and Madelyn you have indicated you would like to pay off your home mortgage in 20 years when you are both 55 years old. Your current mortgage has a remaining balance of $225,000 with an interest rate of 7.75%. You currently have 24 years remaining on your current mortgage which would make your payments $1,723/mth. If you continue to make the normal payments you will not achieve your goal to have the mortgage paid off in 20 years and will pay a total of $271,193 in interest over the life of the loan. There are few options you have to accomplish your goal which I will explain in more detail. The first strategy would be to increase your payments on your current mortgage by $125/mth to $1,847/mth. Here you would achieve your goal of paying off the mortgage in 20 years and your total interest paid would be $218,299. This would save you $52,894 in total interest compared to your current repayment schedule.

The second strategy would be to refinancing your current mortgage with a 15 year loan at 7% interest. This option would increase your payments on your current mortgage by $300/mth to $2,022/mth. The total interest paid would be $139,016 and you would save $132,177 in total interest compared to your current mortgage. This option would incur closing costs of 3% or $6,750 which you said could be paid with separate funds. In this scenario you would accelerate your payment time frame and pay off your mortgage 5 years ahead of your 20 year goal and pay less in total interest over the life of the loan. The downside would be the $300/mth increase in your monthly payment which may not be feasible with your current cash flow.

The third strategy would be to refinance your current mortgage with a 30 year loan at 7.5%. This mortgage would lower your monthly payments by $150/mth to $1,573/mth. You would pay total interest of $341,364 over the life of the loan which would be an increase of $70,171 compared to your current mortgage. Again you would incur closing costs of 3% or $6,750 which you said could be paid with separate funds. The benefit of this mortgage is that it could free up additional cash flow that could be applied to the other goals that you have. The downside of this option is the additional interest that would be paid over the life of the loan. I would only use this option if you were willing to delay your objective of paying off the mortgage in 20 years.

An alternative to this strategy would be to refinance your current mortgage but instead of paying it over 30 years you can make payments that would pay of the loan in 20 years. This strategy would increase your monthly payment by $90/mth to $1,813/month. The total interest paid on this loan would be $210,020 which would save you $61,173 in total interest verses your current mortgage. Again you would incur closing costs of 3% or $6,750 which you said could be paid with separate funds. My

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recommendation is to use this strategy because it would have lower total costs and the monthly payment would increase less compared to the first strategy.

I have included all of the calculations for each strategy on the following page.

Refinance RefinanceCurrent Mortgage 20 years 15 years 30 yearsPV= $225,000 PV= $225,000 PV= $225,000 PV= $225,000FV= $0 FV= $0 FV= $0 FV= $0PMT= $1,722.89 PMT= $1,847.08 PMT= $2,022.36 PMT= $1,573.23N= 288 N= 240 N= 180 N= 360I= .6458 I= .6458 I= .5833 I= .625

Total Interest= Total Interest= Total Interest= Total Interest=1 INPUT 288 1 INPUT 240 1 INPUT 180 1 INPUT 160Shift AMORT Shift AMORT Shift AMORT Shift AMORTEquals Equals Equals EqualsEquals Equals Equals Equals$271,192.81 $218,298.91 $139016.39 $341,363.80

Closing Cost= Closing Cost=$225,000 x .03= $225,000 x .03=$6,750 $6,750

My Recommendation to refinance at 7.5% for 30 years and make accelerated payments:PV= $225,000FV= $0PMT= $1,812.58N= 240I = .625

Total Interest=1 INPUT 240Shift AMORTEqualsEquals$210,020.31

Closing Cost=$225,000 x .03=

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$6,750

Retirement Planning

Frank and Madelyn, you have indicated that your goal is to retire at age 67 and planning for 25 years in retirement. Your desired income is 70% of Frank’s preretirement salary and you would like to factor in your expected social security benefits. As of today Frank you are saving 7% of your salary into the Lakeside Hospital 401(k) plan and your employer is matching 50% on every dollar up to a maximum of 3% match. You currently have saved $18,000 for retirement and we are assuming a 9% rate of return on your invested retirement assets. Frank’s salary will increase at 4% annually and general inflation is 3% annually.

You are interested in knowing if you are on track to meet your retirement objectives. I have calculated the amount of savings that would be needed to reach your retirement goals. Based on the assumptions above you will need to save $26,558/year to achieve your retirement objective. You are currently saving $17,000/year which would make your additional savings need $9,558/year or $797 per month. If you wanted to fund your retirement with one payment today that payment would be $276,367. I will go over several retirement accounts that can be used, describing the features of each account. I have included the retirement calculations at the end of this section.

401K Plan:Frank you currently are saving into your employer’s 401k plan on a pretax basis. Your salary deferrals are not subject to income taxation and you are fully vested in your contributions and their earnings. You can personally contribute up to $17,500 in 2014 and the plan has a limited # of investment selections. Taxes are assessed at your ordinary income rate when you withdraw money from the 401k plan. Last year you personally saved $11,900 into your 401k so you could increase your savings to $15,020/year to meet your retirement objective.

Roth IRA:An alternate strategy would be to open up a Roth IRA. The biggest benefit is that your contributions would grow tax deferred and qualifying distributions would be tax free. You are eligible to contribute (up to $5,500/yr) to a Roth this year because your Modified Adjusted Gross Income (MAGI) is less than the phase out limit ($181,000 to $191,000) for married filing jointly tax status. As your income continues to grow you could lose your eligibility to contribute which is why you both should start funding a Roth IRA today. A Roth IRA would allow for more investment options than your 401k plan which will help

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diversify your retirement portfolio. There is a 10% penalty for early withdrawal unless you qualify for an exception.

Traditional IRA:A Traditional IRA is similar to a Roth IRA in that contributions (up to $5,500/yr) would grow tax deferred and you would have similar investment choices. You may be able to deduct your contributions today based on your MAGI which would make your withdrawals taxable as ordinary income in retirement. As your income grows you will lose the ability to deduct your contribution for tax purposes, these contributions could be withdrawn without tax consequence and only your earnings would be taxable. There is a 10% penalty for early withdrawal unless you qualify for an exception. At any point funds in a Traditional IRA could be converted into a Roth IRA which would make the amount converted taxable in the year of conversion.

SEP IRA:A SEP IRA is frequently used by self-employed individuals where the employer makes contributions on behalf of employees on a non-discriminatory and fully vested basis. This type of plan is easy to establish, contributions are discretionary and is inexpensive to operate compared to other qualified plans. For 2014 contributions would be limited to 25% of the employee’s compensation (up to $260,000 compensation) or $52,000 whichever is less. Madelyn as the employer and owner of the business this plan would allow you to deduct your contributions to the plan for tax purposes up to the contribution limits. This may be a plan that could help you save for retirement especially if you do not see yourself adding any employees to help with your business activities.

My retirement funding recommendation for this year would be to make a full contribution ($5,500) to a Roth IRA for both of you. If your income increases as projected you will lose the ability to contribute to this account type. The benefit of the Roth IRA is that your withdrawals in retirement will be tax free where as your 401k distributions are taxable and ideally you would want to have money saved into different accounts to diversify your tax base which could lower your income taxes in retirement. You have until April 15, 2015 to fund the Roth IRA for the previous year. Based on your current cash reserve and cash flow the funds would have to come from your 2014 tax refund if received before the deadline or Madelyn’s parent’s inheritance funds. Once your MAGI exceeds the income phase out limits for Roth IRAs you can start to save into a Traditional IRA. The contribution may be tax deductible now, depending on your income, but if unable to take the deduction your contributions would still grow tax deferred. You could always convert your Traditional IRA assets into a Roth IRA to take advantage of the tax free withdrawals in the future. The additional $797/month needed to meet your retirement objective can be saved into the Traditional IRA (up to $5,500/yr) after adjusting Frank’s federal income tax withholding. Lastly as Madelyn’s income grows we will look into starting a SEP IRA to take advantage of deductibility of contributions and the additional retirement savings. The amounts contributed will depend on the amount of additional income generated from Madelyn’s business and the deduction needed in any

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given year. All retirement savings should follow the asset allocation program outlined within the investment planning section.

Annual Savings Retirement Calculation:

Step 1 Step 2 Step 3 Step 4 (Begin Mode)(Salary Inflation ) (SS Inflation) (Annual Need) (Total Savings Needed)$170,000 $29,820 $417,458.99 PV = $4,157,997.40X 70% +14,910 -115,183.45 FV= $0$119,000 $44,730 $302,275.54 PMT= $-302,275.54

N= 25PV= $-119,000 PV= $-44,730 I= 5.8252%FV= $417,458.99 FV= $115,183.45PMT= $0 PMT= $0N= 32 N= 32I= 4% I= 3%

Step 4 (Capital Preservation) Step 5 (Savings need/year)PV= $482,193.96 PV= $-18,000FV= $4,157,997.40 FV= $4,640,191.36 ($482,193.96 + $4,157,997.40)PMT= $-0 PMT= $26,557.73N= 25 N= 32I= 9% I= 9%

$26,557.73 Savings need-17,000.00 Current Savings$ 9,557.73 Additional Savings needed per year

Lump Sum Retirement Calculation:$294,366.21

PV= $294,366.21 - 18,000.00 Current savingsFV= $4,640,191.36 $276,366.21 Lump Sum needed todayPMT= $0N= 32I= 9

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Education Funding Recommendation

Frank and Madelyn you have indicated that you would like both Blake and Lisa to further their education and attend college. Your objective is to provide each child with $25,000/year (in today’s dollars) for four years of college having the funds available when each child begins college. I have done a few calculations to determine how much college will cost per year in the future, how much you will need when each child begins college and how much money needs to be saved per year to meet your goal for each child. Economic assumptions expect college expenses to increase at an annual rate of 5% per year and you will earn 9% on your savings.

For Blake, he will attend college in 11 years which turns your $25,000/year today into $42,758/year eleven years in the future. To be able to provide four years at this rate you will need to have saved up $161,847 by the time he turns age 18. To accomplish this we would either need to save $9,217/year or deposit a lump sum of $62,721 today. For Lisa, she will attend college in 13 years which turns your $25,000/year today into $47,141/year thirteen years in the future. To be able to provide four years at this rate you will need to have saved up $178,437 by the time she turns age 18. To accomplish this we would either need to save $7,774/year or deposit a lump sum of $58,202 today.

There are a couple different accounts that can be used to save the required funds in. One option is the IRC Section 529 Savings plan. This account allows you to save and invest in pre selected mutual funds offered by the plan. Contributions can be made regardless of the contributors AGI, provides tax free growth and tax free withdrawals so long as the funds are used to pay for qualified higher education expenses. This type of plan would allow your children to select a school either in state or out of state without limitation. One consideration is that the funds must be used for college expenses and if one child or both decide not to attend college the income would be considered ordinary income to the beneficiary and generally subject to a 10% penalty. If this were to occur the funds could be transferred to the other child or another family member to use for qualified higher education expenses.

The second type of account that could be used is called a Uniform Transfers to Minors Act (UTMA) account. This is a custodial account where the custodian would be in control of the assets until the minor reaches the age of majority in the state in which the account was established. This means that when the children reach the age of majority the funds can be used for whatever the children would like- College or not. This could be advantageous if the children were to receive scholarships for their higher education, the funds then could be used to make a down payment on a home or start a business. But if the children do not receive a scholarship and decide not to go to college then the funds could be misappropriated by either child.

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I am recommending on planning for Blake and Lisa’s higher education by using an IRC Section 529 Saving plan. I am recommending that the accounts be funded in full as a lump sum coming from funds inherited by Madelyn; please see your inheritance strategy recommendation. I have included my calculations on the following page.

BLAKE annual savings (3 steps) LISA annual savings (3 steps)

1. PV= $25,000 1. PV= $25,000FV= $42,758.48 FV= $47,141.23PMT= $0 PMT= $0N= 11 N= 13I= 5 I= 5

Begin Mode Begin Mode2. PV= $161,847.49 2. PV= $178,436.86

FV= $0 FV= $0PMT= $42,758.48 PMT= $47,141.23N= 4 N= 4I= 3.8095 I= 3.8095

3. PV= $0 3. PV= $0FV= $161,847.49 FV= $178,436.86PMT= $9,216.67 PMT= $7,773.88N= 11 N= 13I= 9 I= 9

BLAKE lump sum LISA lump sumPV= $62,721.22 PV= $58,202.29FV= $161,847.49 FV= $178,436.86PMT= $0 PMT= $0N= 11 N= 13I= 9 I= 9

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Investment Allocation

Frank and Madelyn, one of your goals is to develop an investment portfolio that meets your desired rate of return to achieve your retirement and education goals all within your risk tolerance. By developing a well-diversified portfolio of stock and bonds you can invest your savings in the most efficient manner. You have said that you were looking to start a portfolio of stocks and bonds; I have analyzed the portfolio you suggested and will go into detail below.

(1) Asset

(2)Overall

Allocation

(3)Expected

Return

(4) Beta

(5) Weighted AVG

Return [(2) x (3)]

(6) Weighted Beta

[(4) x (2)]

S&P 500 80% 9% 1.0 7.2% .8Value 10% 8.5% .9 .85% .09

Corporate Bonds

5% 6.5% .6 .33% .03

Money Market 5% 1.75% .2 .09% .01 8.47% .93

The expected rate of return of your portfolio would be 8.47% which is the total of column 5 above. The beta of the portfolio would be .93 which means this portfolio would be less volatile than the overall market. Someone with a low risk tolerance or shorter investment time frame would seek out a portfolio beta of less than 1.0. You have indicated that you are moderate to high risk investors, it is acceptable to have a portfolio with a beta greater than or equal to 1.0 as long as you are rewarded for the additional risk. The other issue with your portfolio is that the expected return is 8.47% which is lower than the targeted return for your retirement and education goals. For these reasons I am recommending using the portfolio below.

Investment Policy Statement

Asset Allocation:

(1) Asset

(2) Recommended

Allocation

(3) Expected

Return

(4) Beta

(5) Weighted AVG

Return [(2) x (3)]

(6) Weighted Beta

[(4) x (2)]

S&P 500 50% 9% 1.0 4.5% .5Value 10% 8.5% .9 .85% .09

Growth 10% 10% 1.2 1.0% .12

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Small 10% 13.5% 1.7 1.35% .17Corporate

Bonds20% 6.5% .6 1.3% .12

9.0% 1.0

The expected rate of return for this portfolio is 9.0% which is in line of your target return to meet your goals. The beta of the portfolio is 1.0 which would make the portfolio as volatile as the overall market. This portfolio has two additional asset classes which are providing you with additional diversification. This portfolio is more in line with your goals, objectives and risk tolerance.

Review Process: Your investment performance will be monitored and reported on a quarterly basis and will be evaluated against the appropriate benchmarks. We will review your investment portfolio at least annually to make sure it is still in line with your objectives. You currently have a long term time horizon which means there should be minimal changes to your portfolio unless there are any major market or life changes.

Rebalancing:We will rebalance your portfolio if the percentage within each asset class is +/- 5% of the original allocation. This variation is called portfolio drift and occurs when there is varying returns on the investments. As you accumulate additional savings for your goals we will look at further diversification into other asset classes such as: Mid cap stock, International stock, US Government bonds and International bonds.

Inheritance Strategy

Frank and Madelyn, you are expected to receive a rather large inheritance from Madelyn’s parents estate. You have asked for me to show you what you would need to do to meet your financial goals without factoring these assets into the overall plan. It is extremely difficult to deal with the loss of a loved one, especially parents, I am sorry for your loss. Your parents were able pass along a significant amount of assets that can be used to help make sure your family is financially secure. In this section I wanted to show you the best way to utilize these assets because they will become your assets and they can make an impact on how you accomplish your goals.

By making some adjustments to Frank’s tax withholding we are able to free up enough cash flow to fund your retirement and insurance protection goals completely. As Madelyn’s business generates more income that will allow for additional savings. Until that occurs you would need to set aside funds from this inheritance to put yourself on track to meet these other goals. First I would make sure funds are set aside for your cash reserve because if an emergency comes up and you have to take money away from other goals you have, it will delay the accomplishment of those other goals. Secondly you could fully fund the children’s higher education by funding the recommended 529 plans. You are able to contribute up to $70,000 at one time to a 529 plan which is the 2014 gift tax exclusion of $14,000 multiplied by five years. The projected lump sum amount need for each child’s education is less than $70,000 so a onetime contribution could fully accomplish your education objectives. Lastly using $6,750 to pay for the

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closing costs for refinancing your home would ensure you are on track to pay off the mortgage in 20 years and not have to use any of your current emergency funds. Any remaining funds I would create a Revocable Living Trust, mentioned in the Estate section, and invest according to the investment plan. These remaining funds along with additional savings can be used for additional goals or objectives that you would like to accomplish.

Estate Planning

Estate planning is a very important part of any financial plan. You have expressed interest in starting your estate plan in order to protect your family’s assets and ensure your children are taken care of in the event that either or both of you pass away unexpectedly. I have included below the following documents that you should have in place to meet these objectives that you have.

I am recommending having these in place as soon as possible, if you do not have an estate attorney I would be able to recommend an attorney that I am confident is able to assist in establishing these documents.

Last Will and Testament: Having a will in place will help ensure that your assets will be transferred to your heirs in the manner desired. You can also name a guardian for your minor children.

Letter of Personal Instruction: In the event of your death you want make sure your executor is aware of the location of your important financial documents and the importance of certain actions requested. The letter of personal instruction can make sure that the executor is aware of these final directions.

Durable Power of Attorney: A document that would name an attorney in fact to handle your financial affairs if either of you were to become incapacitated. The Durable POA should have a broad focus because it would be less restrictive and more likely to be honored by financial institutions.

Durable Power of Attorney for Health Care (DPOAHC): This is a document that provides a surrogate decision maker the authorization to act on your behalf if you are unable to make your own medical decisions. The most important quality of a surrogate decision maker would be their care giving abilities.

Living Will: This is a document where you may elect to suspend medical care in the event that you become terminally ill. Here direct instruction would be provided from you to your doctor on how to proceed in situations of terminal illness where you are expected to live only a few more days or weeks. I would have the living will created at the same time you set up your DPOAHC.

Revocable Living Trust: Creating this trust will protect your assets from the probate process and is useful in planning for incapacity. You have the ability to designate successor trustee to manage your

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assets in the event that you were to become incapacitated or pass away while the children are minors. At this time your assets are not in danger of being subject to estate taxes because $5,340,000 is the current exemption. We will continue to monitor your assets to determine if gifting or the creation of an irrevocable trust would be needed to avoid estate taxes. For now a revocable living trust will provide the most benefit.

Other Considerations

Frank and Madelyn you have indicated that you would like to assist Frank’s parent’s with their medical care and retirement needs. That really speaks to your commitment to your family but unfortunately I am not able to share their financial records with you at this time. As a CFP® Professional I am required to adhere to the CFP Board’s Standards of Professional Conduct and under the Code of Ethics I am required to observe the Principle of Confidentiality. This means I would not be able to disclose any of their financial records without their consent or agreement. I think the best course of action would be for me to meet with your parents and update their financial plan so that we can better assess their retirement needs to determine if they would need any assistance in the future. If they would like to share with you their financial status after providing consent we can meet and discuss what further help they may need.

Madelyn in regards to your parent’s estate you have indicated that your sister Joanne is considering disclaiming the assets to help provide for your kids’ education and other needs. Unfortunately she would not be able to disclaim the assets and dictate who should benefit from those assets. There are a few strategies, such as a 5 year 529 plan contribution or funding a minor’s trust for each child, which your sister could use to provide funds to the children without disclaiming the assets. I would recommend having your sister meet with me to discuss her objectives and show her how an analysis of her overall situation could help her determine the best course of action in regards to these funds.

Madelyn as your business continues to grow you would want to consider creating a business entity to protect against personal liability. A limited liability company (LLC) would offer limited liability and have pass through tax treatment. In order to create this entity you would need to file an article of organization with your state. After researching your state guidelines I have found that you would be able to set up a one-member LLC instead of a sole proprietorship which is beneficial because the LLC would protect your personal assets from any business liabilities. The sole proprietorship would not protect your personal assets from your business liabilities which is why you would create the one-member LLC.

In this analysis you have asked that I project your retirement needs and include your expected Social Security benefits. There is serious concern that Social Security benefits will not last and will eventually run out. Based on your age and these concerns you may not want to consider including these funds in your plan. It may be better to not plan for the Social Security benefit and if there is a benefit when you retire even better you will have more income to meet your lifestyle needs. If you agree I can show you what it would take to meet your retirement needs and show you the savings needed to reach

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retirement. Please understand that it would require more savings to accomplish the retirement goal but it could present a more accurate picture of your retirement needs.

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Financial Plan Final

Documents

Transcript of Financial Plan Final