Silver Case Study Instructor Notes

Managing Retirement Income

Case Study

Case Study: Meet the Silvers!

The Silvers are both 68 and are getting ready to fully retire. They have never worked with a financial advisor but realize that they are about to make some decisions that will last their lifetime. Based on a referral, the Silvers have asked to meet with you. They are very organized and have brought all the information you need to complete the Managing Retirement Income Planning Worksheet.

During your interview, you have determined that both the Silvers are in relatively good health. Based on the recent performance of the stock market, they concerned about the stock market but would not be averse to adding to their equity position. They have two children and three grandchildren. They want to make sure that they are not a burden to their children, but also have a very high desire to leave as much as possible to their children and grandchildren in the form of bequests.

Other Assumptions:

§ You have already completed the “Monthly Income Need” worksheet for the Silvers and their annual essential expenses equal $27,360, while their discretionary spending is $12,750. They feel this pattern of spending will continue over their entire retirement and plan on living to age 85.

§ $27,000 in a non-interest bearing bank checking account (earmarked for emergencies), but is available as a retirement resource. They also have $60,000 in a brokerage money market account earning 3%. One of your recommendations will be to consolidate the accounts into the money market account. Be sure to reflect this in the “Asset Allocation Worksheet”.

§ $226,000 in a 401(k) account, with $152,000 in fixed income funds and $74,000 in equity funds. The Silvers want to rollover their 401(k) plan assets into their IRAs to simplify recordkeeping. Again, be sure to reflect this in the “Asset Allocation Worksheet”.

§ IRAs worth $203,000, with $156,000 in fixed income and $47,000 in equities.

§ Their home is worth $300,000, no mortgage; they have been there 25 years and have no plans to move now or in the future. Do not include their personal residence in the “Asset Allocation Worksheet”

§ They do not have any long-term care insurance or employer-provided retiree medical insurance.

§ The present value of their Social Security benefit of $17,100 is $258,106.

§ They would like to leave $50,000 to each of their two children ($100,000) total.

For the purposes of this case study, we will assume that the Silvers immediately convert assets into a variable annuity to meet their essential needs gap. Realize, however, that delayed annuitization may be a better approach in real life. Every $100k invested in a variable annuity will produce the following joint and survivor income at the following ages:

68 - $6,840/yr 70 - $7,200/yr 72 - $7,600/yr 74 - $7,950/yr 75 - $8,200/yr

Assume that the allocation within the variable annuity is 100% Domestic Equities.

Assignment #1:

Based on the assumptions above, complete the following worksheets

1. Income Resources and Gaps on page 4.

- Complete this worksheet based on their current situation today before
converting assets or consolidating any accounts.

2. Asset Allocation Worksheet on page 11.

- Use the “Balanced” portfolio when repositioning assets

- Although you may want to shift assets to International Equities, for the purposes of the case study, keep all equity positions in Domestic Equities. Also, do not allocate assets to Real Estate.

3. Income Allocation Worksheet on page 12.

- Remember that you should implement both the asset allocation and income allocation recommendations at the same time whenever possible in order to minimize transaction costs.

When completing the Asset Allocation Worksheet, the following instructions may be helpful:

1. Complete the “Current Dollar Amount” column using the given assumptions. You will find a present value table on page 100 in your workbook.

2. a. Determine the current subtotal asset allocation for each asset class in the “% of
Portfolio” column next to the “Current Dollar Amount” column.

b. Identify the closest current risk tolerance portfolio at the bottom of the
worksheet.

c. Indicate the desired risk tolerance portfolio at bottom of the worksheet.

d. Place asset allocation percentages for the desired portfolio in the appropriate “% of Portfolio” column next to the “Desired Dollar Amount” column. For now, just enter the total percentage for each asset class on the subtotal line.

3. a. Calculate the subtotals and total in the “Desired Dollar Amount” column for
each asset category using the desired percentage of the portfolio to the right.

Note: Make sure that the “Totals” for both the “Current Dollar Amount” and
“Desired Dollar Amount” columns are equal.

b. Calculate the subtotals and total for each asset class in the “Amount to
Reposition” column. Note: The amounts in the “Amount to Reposition” column
should add up to zero.

4. Decide where you will you will take money from and where you will put it within each asset class in the “Amount to Reposition” column.

5. Fill in the desired dollar amounts within each asset class in the “Desired Dollar Amount” based on the repositioning determined in step 4.

When completing the Income Allocation Worksheet, the following instructions may be helpful:

1. Complete the “Current Asset Value” column, before asset allocation rebalancing, using the given assumptions. You will find a present value table on page 100 in your workbook.

2. Using the Income Resources and Gaps worksheet on page 4, fill in estimated total essential and discretionary gaps (Gap A & Gap B) at the top of the last two columns.

3. Using the Income Resources and Gaps worksheet on page 4, fill in the current income and total essential expenses and discretionary spending needs.

4. Determine your overall strategy for converting assets to fill the essential expenses and discretionary gaps. Based on your strategy, fill in the appropriate additional income needed in the “Essential Income” and “Discretionary Income” columns across from the respective “Lifetime Sources” and “Managed Sources”. If your strategy indicates additional income from a current source, enter the total amount in the appropriate space. Add the subtotals for these two columns.

5. Complete the “Amount Converted” column for assets that need to be repositioned to fill gaps. You will want to reposition assets to correspond with your asset allocation rebalancing determined on the Asset Allocation Worksheet. Note: Any account rollovers should also be reflected in this column and the “Post Conversion Asset Value” column. The amounts in the “Amount Converted” column add up to zero.

6. Complete the “Post Conversion Asset Value” column based on repositioned assets in the “Amount Converted” column. Note: Make sure that the “Totals” for both the “Current Asset Value” and “Post Conversion Asset Value” columns are equal.

7. Determine the percent of income coming from managed assets at the bottom of the worksheet.

Assignment #2: Large group discussion questions

Now that you have completed the worksheets, what are your conclusions?

a. Do they have enough resources to meet all their retirement, housing and estate planning goals? If not, how can you help them think about alternatives that may be required now or in the future?

b. What retirement risks do they need to understand and how can you help them manage those risks?

c. Do you have any other suggestions that will allow them to live with confidence during retirement?