A Case Study in Financial Planning

Full Transcript:

I talk a lot about financial planning, both in my videos and on my website. However, many of you may not have seen financial planning in action. Today, I’ll go over a case study, introducing you to Jane and John Smith and showing you a part of their financial plan.

Meet the Smith Family. Jane and John are in their late thirties and have two daughters, Zooey and Eva. Jane is a reservoir engineer, and John works in corporate finance. They came to me because they knew they were doing okay with their money, but felt that they could be doing better. They have some dreams and aspirations, but don’t have a clear line of sight on how to reach them.

We sat down, and I asked them questions to learn more about their family, understanding what is important to them. Through these questions, I helped them define goals. They determined that they wanted to protect and provide for their daughters, including paying for four years of college. They also wanted to buy a dream home this year with more space and a pool the family can enjoy together. Lastly, John wants to transition out of corporate finance to a nonprofit job where he feels that he can have more impact. He knows this will be a significant reduction in pay and would like to do it in the next five to ten years. Jane likes working in engineering and would like to retire in her late fifties.

Following this discussion, I reviewed and analyzed their financial documents and built the first pass of their financial plan.

Here you will see an interactive view of their financial plan. The bar chart shows their projected portfolio value up until retirement at Jane’s age of 58. The toggle switches let us toggle on and off each part of that financial plan to see how it impacts the portfolio. Upon full analysis of their financial plan, I determined that they needed $6 million in retirement to maintain the lifestyle that they desired. Here you will see that they have a projected $5.8 million. So they’re close, but that’s before adding in their other goals.

In order to boost their retirement savings, we talked about backdoor Roth IRAs. By both of them doing these up until retirement, you will see it adds an extra $700,000 of value to the portfolio tax-free. Additionally, John can max out his 401K. By doing this, he also adds another million dollars to the portfolio.

At this point, they now have a surplus, so we can start adding in some of their other goals. When they buy the dream home with more space and the pool, we will see that the portfolio goes down as we’re allocating resources away from the portfolio to that home. Additionally, let’s show what happens when John career changes at age 45 to a nonprofit. This reduction in income also has an impact in their portfolio. However, they’re still over that $6 million threshold.

Lastly, they wanted to pay for their daughter’s college. By doing this, it drops back below the $6 million portfolio. So you see that they’re just shy of it, at a projected $5.9 million. This is where some optimization can come into play. Instead of cash flowing their daughters’ college, they can pay for Zooey and Eva’s college using a tax-advantaged 529 account. By doing this, it gets them back above that $6 million.

Here we now have a plan that they can use to achieve their goals, and have a secure retirement. This plan has been simplified to show the value of planning in this short video. To learn more about their case study, visit newheightsplanning.com.