Personal Financial Planning

The number one goal of Century Management is to assist our clients in the attainment of financial security through financial planning and money management. The financial planning process combines planning with ongoing advice to help each client make certain that the total financial picture is constantly being evaluated with respect to changing conditions. We make specific recommendations that are designed to provide more efficient use of the client's growing resources, to improve net worth, to reduce income and estate taxes, and to increase after-tax cash flow.

A fact-finding session helps us become totally familiar with your current financial situation, as well as your personal goals and priorities. Working from the comprehensive information gathered in the fact-finding session, a detailed financial plan is prepared which documents your current situation, identifies all areas that will be impacted, and makes specific goal-oriented recommendations. Recognizing our ever-changing tax environment, we also work to assure that you are positioned in the most effective manner relative to your personal tax situation.

Each recommendation in our analysis is then thoroughly reviewed with you to confirm your understanding and support of each recommendation. If desired, we actively assist in the full implementation of every plan recommendation in conjunction with the other members of your financial advisory team.

The following example is a combination of two actual cases that were completed during the 2002 calendar year. The following example provides a realistic example of some of the benefits that a financial plan can provide.

Marke & Cher Daler

In many financial planning cases, there are one or more variables that have a substantial impact on the results of the analyses. Sometimes these variables are unknown at the beginning of the analysis. As each case proceeds, the variables become apparent and often produce dramatic differences in the results that are generated. In the preparation of the financial plan Marke and Cher Daler, two analyses were prepared, Daler Financial Pan and Daler Alternative Analysis. In the example that follows, the impacting variables revolve around existing liabilities, life insurance, and stock options.

The issues that produced the greatest impact in the analysis revolve around stock options and life insurance. Differences between the analyses will be discussed in detail in the various sections that follow. As each section of the summary is reviewed on the following pages, unless otherwise indicated, the material being reviewed will apply to all scenarios. Following the summary, recommendations will be given for the implementation of the financial plan. After the recommendations you will find the initial analyses, Daler Financial Pan followed by Daler Alternative Analysis, which illustrate the benefits that the client can receive after the implementation of the recommendations.
Personal Data

Marke T. Daler
DOB: 5/18/1948
SS No.: 123-45-6789

Occupation:
XYZ Company
Regional Supervisor
123 Industrial Blvd.
Anywhere, TX 11111
(936) 273-0000

Cher Daler
DOB: 1/27/1950
SS No.: 987-65-4321

Occupation: Homemaker

Children:
Sean Daler
DOB 8/15/1987
SS No. 456-78-1234

Home:
1000 Residence Lane
Anywhere, TX 11111
(936) 233-0000
(936) 233-0000 fax
(936) 695-0000 cell tdaler@em.com Client Goals & Objectives

Marke and Cher would like to:

A. Complete a comprehensive financial plan.

B. Provide for five years of medical school for Sean.

C. Determine if assets will be sufficient to provide for their goals and objectives.

D. Include the purchase of replacement automobiles for Marke and Cher.

E. Evaluate their life insurance needs to determine the amount and type of life insurance that is actually needed.

F. Continue to provide support for their parents.

G. Evaluate the different alternatives available to them in dealing with their stock options.

H. Determine if Marke will be able to retire in one more year.

I. Complete an estate analysis.

Identification of Issues & Problems

A. Based on the amount of life insurance that is needed, what type of coverage should be purchased?

B. In the stock option analysis, assumptions will have to be made regarding projected stock values in the future. In reality, the value of the stock may be higher or lower than what is projected.

C. If stock options are exercised at a later date at a much lower price than what is projected, what affect will this have on their financial plan?

D. Can stock options be exercised and then held for twelve months without adversely affecting cash flow and other retirement goals?

E. When options are exercised, will Marke and Cher become subject to additional tax liability due to Alternative Minimum Tax calculations?

F. What additional expenses will Marke and Cher have that are not included in the analysis (such as: health-related expenses, additional expenses related to their home, or additional expenses relating to Sean)?

G. What additional strategies can be implemented to reduce the cost of passing their estate from one generation to the next?

H. What are the objectives with regard to the estate?

Assumptions

A. Unless otherwise indicated, ages referred to in the analysis apply to Marke’s age.

B. An average annual inflation rate of 3.6%[1] is used in the analysis.

C. Personal living expenses and miscellaneous insurance premiums inflate at a 3.6% average annual inflation rate.

D. College expenses for Sean are based on five years of medical school.

E. Report illustrates no reduction in income needs.

F. A retirement age of 55 is used in the analysis.

G. Joint filing status is used in the tax analysis.

H. Social Security benefits for Marke begin at age 62.

I. Social Security benefits for Cher also begin at age 62.

J. Retirement account distributions begin at age 70 or when required by income needs.

K. Life expectancy for Marke is age 96.

L. Life expectancy for Cher is age 96.

M. The tax calculations assume that the 2001 tax changes expire after 2010 (pre-2001 rates reinstated in 2011).

N. Estate administration rate is 3.25%.

Cash Flow

The first section that will be examined is the Cash Flow section. The Cash Flow section examines income being generated versus expenses, both now and in the future. We begin by looking at the various sources of income and how this income will be used. Income may be generated from a variety of sources, such as:

Earned Income (self employment) Social Security Misc. – (inheritances, sale of residence, investment account systematic withdrawal plans or interest/dividends taken in cash, scheduled retirement account distributions, or required minimum distribution amounts)

The cash flow and annual expense section of the financial plan examines the demands that are to be placed on this income, such as:

Personal Living Expense Life Insurance & Other Premiums Mortgage & Debt Payments Planned Deposits to Investment & Retirement Plans Miscellaneous Expense Items Taxes

If income from the various sources exceeds expenses, the excess is reinvested in savings and investment accounts. If expenses are greater than income, it is assumed that funds required to meet such excess expenses will be drawn from the taxable account, equity, and retirement accounts to make up the shortage.

Earned Income: In the analysis, earned income of $267,480 is included in the first year in the analysis.

Daler Financial Plan: First year annual cash flow need for all expenses equals $293,887 which is comprised of the following amounts:

1) Personal Expenses: $ 81,200 2) Life & Misc. Ins. Premiums: 37,729 3) Debt payments: 35,244 4) Retirement Account Deposits: 11,004 5) Other Expenses: 24,759 6) Itemized Deductions: 29,677 7) Income Tax: 74,274 Total: $293,887

Daler Alternative Analysis: First year annual cash flow need for all expenses equals $233,378 which is comprised of the following amounts:

1) Personal Expenses: $ 81,200 2) Life & Misc. Ins. Premiums: 9,275 3) Debt payments: 27,948 4) Retirement Account Deposits: 11,004 5) Itemized Deductions: 29,677 6) Income Tax: 74,274 Total: $233,378

In the alternative analysis there four differences between the two scenarios; 1) the automobile loan on the Volvo are paid off 2) the life insurance policy XYZ Mutual Life is replace with a paid up no-load life insurance policy 3) an irrevocable life insurance trust is established for the new policy 4) stock options are exercised immediately as they become vested. A detail discussion of these differences is outlined on the following pages of the Summary and Recommendations.

1) Personal Living Expenses: Personal living expenses do NOT include scheduled outlays for items covered in other areas of the report, such as loan payments, insurance premiums, savings, investment additions, and income taxes. Personal living expenses are an after-tax dollar amount that is available for various living expenses.

In each analyses personal living expenses are based on $6,767 a month or $81,200 a year. Personal living expenses inflate at a 3.6% annual inflation rate. There is no reduction in personal living expenses in either analysis.

2) Life & Misc. Ins. Premiums: In each analysis, the following miscellaneous insurance premiums are included: Auto Ins. $1,838 Homeowners Ins. 3,151 Medical 4,153 Total: $9,142

Life Insurance Daler Financial Plan: Marke: XYZ Mutual Life $28,454 Marke: Group Term 133

Cher: Group Term 133 Total: $28,720 Daler Alternative Analysis: Marke: Group Term $133 Marke: No-Load Universal Life Co. 0

Cher: Group Term 133 Total: $266

In each analysis, group term life insurance coverage remains the same. Group term life insurance coverage remains in force until age 60. The alternative analysis uses a portion of the cash value received from XYZ Mutual life to purchase a paid-up no-load life insurance policy.

*Life and miscellaneous insurance premiums in Daler Financial Plan equal $37,729 for the first year of the analysis. Life and miscellaneous insurance premiums in Daler Alternative Analysis equal $9,275 for the first year of the analysis

3) Debt Payments: Daler Financial Plan includes two liabilities in the analysis, the mortgage for your residence and an automobile loan. Automobile payments for the Ford Expedition equal $608 a month. Mortgage payments for principal and interest equal $2,329 a month. The mortgage payments are based on an account balance of $262,481 financed at a 7.0% interest rate.

The alternative analysis uses cash surrender values from XYZ Mutual Life to pay off the current automobile loan. Monthly mortgage payments remain as is in each analysis.

4) Retirement Plan Deposits: Contributions to Marke’s 401(k) continue for one more year until retirement.

5) Itemized Deductions: Charity, medical, and property taxes equal $29,677 in the first year of the analysis. Charitable contributions are based on annual contributions of $12,000 a year. Medical expenses are based on $3,832 a year. Charitable contributions and medical expenses remain level throughout the analysis. In the cash flow section of the analysis mortgage interest is included within the column designated for debts payments.

Property taxes calculations are based on a tax rate percentage of 2.13% of the residence market value. In each analysis the annual inflation rate for the residence is 3.6% per year. As your residence increases in value, property taxes adjust accordingly. Property taxes in the first year of the analysis equal $13,845.

6) Taxes: Federal income tax liability in the first year of the analysis equal $74,274, which is based on the tax liability from the previous year. Beginning year two, the tax liability is recalculated annually based on the individual circumstances of that particular year.
Information that follows is outlined year by year in the Cash Flow section of each analysis under Other Income (Expense), Other Single Year Income or Expense, and Multiple Year Income & Expense):

Other Single Year Income or Expense:

1) Automobile: In each analysis, five automobiles are purchased throughout the planning period. The automobiles are purchased at age 56, 60, 64, 68, and 72. The purchase price of the automobiles is based on a current out-of-pocket cost of $30,000 inflated at a 3.6% annual inflation rate. At the time of purchase, the automobiles’ projected cost will be $32,199, $37,092, $42,729, $49,222, and $56,702. The analysis assumes that cash is paid for each of the automobiles at the time of purchase.

2) Consulting & Legal Fees: Daler Alternative Analysis includes additional first year expense of $7,000 for consulting and legal fees. This is an estimate of potential fees to establish an irrevocable life insurance trust and to purchase a no-load life insurance policy.

Multiple Year Income & Expense:

1) Sean – Medical School: Marke and Cher would like to help pay for college expenses for Sean while he works toward his medical degree. Annual college expenses are based $20,000 a year, for five years inflated at a 4% annual inflation rate. College expenses increase each year based on a 4% inflation rate.

2) Parents: To assist in the support of their parents an additional expense of $5,000 a year is included in the analysis for the next 20 years. Support payments increase each year at a 3.6% annual inflation rate.

Based on the variables outlined above the following results were produced:

❑ Daler Financial Analysis: ▪ Earned income and investment assets are NOT sufficient for all of your cash flow needs. Assets used to satisfy cash flow needs are depleted by age 79.

❑ Daler Alternative Analysis: ▪ Earned income and earnings from investment assets are sufficient for all of your cash flow needs.
Investments

The investment section examines how various rates of return will affect the client’s ability to accomplish the goals and objectives as outlined at the beginning of the recommendations. The investment section does not make specific recommendations as to which assets to invest in. A detailed list of investment assets used in the analysis can be founding the Account Section of the financial plan

Asset values are based on their current values. The analysis assumes that investment assets will earn a 9% return in the future, even though the assets may currently be worth less then there originally purchase price. Where the cost basis of the assets is higher than their current value, the amount of the loss is reflected in the unrealized appreciation figure. This enables the investment assets to appreciate by that amount without any additional tax consequences.

In the analysis, assets in checking accounts and the Woodlands Golf Club membership are considered personal assets and are not included in the analysis.

Daler Financial Plan: beginning year account value of investment assets equals $1,739,887:

Taxable (Money Market) Accounts: $ 87,674 Equity & Other: 370,690 Tax Deferred: 78,541 Qualified Retirement Accounts: 1,194,546 Roth IRA: 8,436 Total: $1,739,887

Daler Alternative Analysis: beginning year account value of investment assets equals $1,789,553:

Taxable (Money Market) Accounts: $137,340 Equity & Other: 370,690 Tax Deferred: 78,541 Qualified Retirement Accounts: 1,194,546 Roth IRA: 8,436 Total: $1,789,553

Daler Alternative Analysis includes an additional $49,666 of investment assets. The additional asset is a portion of the cash surrender value received from XYZ Mutual Life Insurance Company. Cash surrender values are included in the taxable (money market) account portion of the investment assets.

Variables: 1) The annual rate return generated by all investment equity assets consists of 20% dividends and 80% appreciation or growth.

2) All equity assets earn a 9% annual rate of return except Roth IRS and the variable annuity.

3) Roth IRAs earn an 8% annual rate of return.

4) The variable annuity earns a 6% annual rate of return.

5) Corporate bonds earn a 6% annual rate of return.

6) Government bonds and T-Bills earn a 4% annual rate of return.

7) Money market accounts earn a 2% annual rate of return.

8) Partnership assets appreciate at a 3.6% annual appreciation rate.

9) In the analysis, when there is a cash surplus, it is reinvested with 10% allocated to your fully taxable account (money market) and the remaining 90% into your equity account.

10) As income is needed in the future, assets in the taxable account (money market) are accessed first, then assets in the equity account, and finally assets in the retirement account.

Recommendations: • At retirement consolidated the nine equity accounts into three accounts. Roth IRAs and the variable annuity are not included in the consolidation. Roth IRAs and the variable annuity must remain in a separate account.

• Currently the government bonds are selling above PAR. Reposition government bonds into equities to take advantage of the increase in value that the reduction in interest rates has produced. Equities have decreased substantially; it is recommended that you reinvest 75% of the bond proceeds into stocks. Once interest rates increase in the future, complete an evaluation to determine if a portion of the stocks should be reinvested back into bonds.

• Complete an analysis on the corporate bond portfolio to determine the most appropriate course of action. For example, what interest rate are the corporate bonds paying and are the bounds currently trading above or below their par value.

Based on the parameters outlined above, the following results were generated after all cash flow needs had been met:

❑ Daler Financial Plan: ▪ Investment assets equaled $2,573,716 by age 62. ▪ Investment assets equaled $1,601,187 by age 72.

❑ Daler Alternative Analysis: ▪ Investment assets equaled $3,490,669 by age 62. ▪ Investment assets equaled $4,849,574 by age 72.
Stock Options

The stock option analysis consist of examining the effect that the stock options would have on the overall financial plan based on two possible scenarios. Both ISOs and NQSOs are included in the analysis. The annual appreciation rate that stock option proceeds receive after the stock has been sold is 9% a year. Other variables used in the analysis are:

Name: Exxon Mobil Current Date: 6/6/2002 Current Price Per Share: 39.56 Annual Appreciation Rate: 5%

To complete the analysis two scenarios were created. The stock option scenario included in Daler Financial Plan is based on Marke’s intentions laid out at the beginning of the financial plan. The stock option scenario included in the alternative analysis is based on the recommended procedure for dealing with the stock options.

1) Daler Financial Plan - Sell a Portion (pay for cost of exercise): o The stock options are exercised at the time that they are fully vested. A limited number of shares are sold at the time that the options are exercised in order to pay the tax consequences resulting from exercising the stock options. The amount of shares that are sold will vary depending on the tax consequences at that time. The remaining shares are then sold one year after the date of exercise so the remaining proceeds are taxed at long-term capital gains rates.

2) Daler Alternative Analysis - Sell Stock When Options Are Exercised: o At the time that the stock options become fully vested stock options are exercised. Stock that is received from exercising the options is simultaneously sold. All proceeds from exercising the stock options are taxed at ordinary income tax rates.

Strictly from a Federal income tax standpoint, you would normally think that it is better to exercise stock options and then hold the stock for at least one year so proceeds would receive long-term capital gains tax treatment when the stock is eventually sold in the future. However, this strategy generates additional Alternative Minimum Tax liability of $237,017 in the first year of the analysis. Taxes are just one of the many variables that need to be consider.

There are many variable and assumptions that need to be made in the analysis. The main variable however, still remains an unknown. At what price will Exxon Mobil stock trade for at the time that the options are exercised? This single variable can have a larger impact than any of the other variables in the analysis.

Based on the parameters outlined above, the following results were generated. The beginning year account values of the investment assets are listed below.

❑ Sell Part (pay cost of exercise): Age 55: = $1,875,542 Age 58: = $2,652,999 Age 60: = $2,613,120 Age 62 = $2,573,716

Exercise Options When Received: Age 55: = $3,192,613 Age 58: = $3,163,716 Age 60: = $3,342,341 Age 62 = $3,490,669

It is recommended that stock options are exercise as they become available. Once exercised, diversify assets by reinvested proceeds into alternative investments.

Risk Management

The purpose of the risk management section is to examine existing insurance coverage and make recommendations. The goal is to determine whether there is adequate coverage and/or any additional coverage that may be needed. It is recommended that you periodically review all current insurance policies that are in force to assure that adequate coverage is maintained.

Property and Casualty Insurance: Property and casualty coverage limits were not provided for analysis. It is recommended that the following minimum limits be maintained.

Automobile policy liability limits. Liability bodily injury and property damage coverage of $100,000/$300,000, bodily injury and $50,000 property damage coverage. Un-insured and under-insured motorist bodily injury and property damage coverage of $100,000/$300,000 bodily injury and $25,000 property damage coverage. Property damage limits should be sufficient to replace your automobile if an accident was caused by an uninsured or under- insured motorist. Deductibles of at least $200 for comprehensive and $500 for collision are usually more cost effective than lower deductibles.

The homeowner insurance policy should be written to cover the replacement value of the home. Personal liability coverage limit of $300,000 and medical coverage limits of $5,000 are recommended. It is also recommended that the replacement cost estimator be updated periodically to make sure that adequate coverage is maintained.

Umbrella Liability Policy: If you do not have an Umbrella liability policy, one should be purchased. An Umbrella policy is a liability policy that provides additional liability coverage on all you do personally, such as activities involving your autos, home, and recreational activities. The more you own and the greater your assets, the more exposure you will have. Policies range from $1,000,000 to $5,000,000 in coverage. Umbrella policies are usually very inexpensive based on the amount of coverage received. Policies average $100 to $400 dollars a year depending on the amount of coverage. There are minimum liability requirements that the insured must have on the auto and homeowners insurance policies in order to qualify for an Umbrella policy. Visit with your insurance agent handling your auto insurance for additional information.

Disability: Maintain current disability coverage until retirement. Disability policies provide benefits for loss of earned income due to disability. When earned income stops, there is no longer a need for disability coverage.

Health Insurance: Information on health insurance was not provided for analysis.

Life Insurance: According to the information provided, Marke is currently insured by three separate individual life insurance policies with a total death benefit of $1,187,991. Cher is currently insured by two individual life insurance policies with a total death benefit of $156,822.

An analysis was completed to determine the amount of life insurance benefits, if any, which would be needed for the survivor. The income needs calculations are based on annual expenses, sources of income, and immediate cash needs. The insurance section of the financial plan lists in detail immediate cash needs at death.

• For annual expenses, it was assumed that at the death of one spouse, the surviving spouse would need 80% of the after-tax income that was needed prior to the death of a spouse.

• Immediate cash needs for Marke and Cher included final expenses and other cash needs and estate administration, and legal costs.

• The mortgage balance of your residence and other debts are paid off only when Marke passes away.

The life insurance analysis was completed on each scenario and produced the following results.

o Daler Financial Plan: Total life insurance need for Marke in the first year of the analysis equals $768,388. In the third year of the analysis the life insurance need decreases to $82,231. By the fourth year Marke’s life insurance need disappears and then reappears in by year seven. By year seventeen Marke’s life insurance need increases to over $1 million and continues to increase each year for most of the analysis.

Total life insurance need for Cher in the first year of the analysis equals $552,480. In the second year of the analysis the life insurance need increases to $684,443. The life insurance need on Cher’s goes to zero by year three and then reappears by the ninth year. By the eighteenth year Cher’s life insurance need also increases to over $1 million and remains above that level for the remainder of the analysis.

o Daler Alternative Analysis: Marke has a total life insurance need in the first year of $647,099. Marke’s life insurance need in year two is zero. The life insurance needs remains at zero for the next ten years.

Cher has a total life insurance need in the first year of $392,491 and then decreases to zero by year two. Cher’s life insurance need remains at zero for the next sixteen years.

There are many factors that can and will affect these numbers in the future. Two large variables are the amount of income that Marke is able to generate and the actual rate of return that the investment assets receive. The farther out you look in the analysis, the less accurate the analysis becomes. The life insurance needs analysis is based on the variables used in the analyses. For example, if the annual rate of return received by investment assets is greater than 9%, the life insurance needs decrease. If the annual rate of return received by investment assets is less than 9%, the life insurance needs will increase.
Recommendations:
It is recommended that current life insurance policies on Marke and Cher be cancelled after 1 year. There will no longer be a life insurance need for a survivor. There will be a life insurance need for the payment of estate taxes.

Daler Alternative Analysis, a second-to-die no-load universal life policy is purchased for $1 million in coverage. Coverage includes a term rider for $500,000 that pays a death benefit to the survivor if one of the spouses passes away in the first four years. A single premium of $76,000 is used to purchase the policy. The premium is paid with the cash surrender value from XYZ Mutual Life policy. Cash surrender value of $142,657 are used to purchase a paid up no-load life insurance policy, pay off the current automobile note, and add an additional $49,666 to the investment assets.

Currently, your insurance is part of your taxable estate. Should both of you pass away, the life insurance proceeds would increase the size of the estate thereby making the estate subject of estate taxes. A life insurance trust should be established to hold the second-to-die life insurance policy.

A second-to-die policy covers the lives of two people. Policy proceeds are paid after both insurers have passed away. The most common use of survivorship policies is to provide for the payment of estate taxes. Since two individuals are insured instead of one, mortality charges in a survivorship policy are less than policies that cover one individual.

If a survivorship life insurance policy is purchased, it is recommended that you choose a no-load life insurance policy. A no-load policy pays no commissions so premiums are frequently 30% to 50% less than those charged for a regular commission policy. A no-load policy usually has no surrender charges whereas a commission policy would carry a 15-year to 20-year surrender charge from the date of issue. No-load policies quite often pay a slightly higher interest rate than a commission policy due to lower expenses.

Taxes

The tax section of the recommendations estimates your potential income tax liability for the 2002 tax year. The following analysis is based on Marke receiving W-2 income of $267,480 for the 2002 calendar year.

Daler Financial Plan:
Income:
W-2 Income: $267,480 Int. and Dividends: 8,786 Stock Option Proceeds: 213,564 401(k) Contributions: (11,004) Adjusted Gross Income: $478,826

Itemized Deductions: ($33,973) Personal Exemptions: (0) Total: ($33,973)

Taxable Ordinary Income: $444,853

Total Federal Tax: $142,472 Additional AMT Tax: 240,894 FICA Tax: 9,142 Total: $392,508

Projected tax liability through tax year 2009 (includes Federal tax and FICA tax):

Daler Financial Plan: 2002 tax year: $392,508 2003 tax year: $387,709 2004 tax year: $40,508 2005 tax year: $11,176 2006 tax year: $0 2007 tax year: $0 2008 tax year: $0 2009 tax year: $18,023
Daler Alternative Analysis:
Income:
W-2 Income: $267,480 Int. and Dividends: 32,560 Stock Option Proceeds: 1,146,018 401(k) Contributions: (11,004) Adjusted Gross Income: $1,435,054

Itemized Deductions: ($8,844) Personal Exemptions: (0) Total: ($8,844)

Taxable Ordinary Income: $1,426,210

Total Federal Tax: $521,276 FICA Tax: 9,142 Total: $530,418

Projected tax liability through tax year 2009 (includes Federal tax and FICA tax):

Daler Financial Plan: 2002 tax year: $392,508 2003 tax year: $387,709 2004 tax year: $40,508 2005 tax year: $11,176 2006 tax year: $0 2007 tax year: $0 2008 tax year: $0 2009 tax year: $18,023

Daler Alternative Analysis: 2002 tax year: $530,418 2003 tax year: $71,219 2004 tax year: $33,855 2005 tax year: $0 2006 tax year: $0 2007 tax year: $0 2007 tax year: $1,284 2008 tax year: $1,119

Total first year tax liability in Daler Alternative Analysis is greater then the first year total tax liability in Daler Financial Plan. However, the total potential tax liability over the first four years of the analysis in Daler Alternative Analysis is substantially less.

Financial Independence & Retirement

In order to determine whether there is adequate income and capital to fund your retirement, a number of factors must be evaluated.

• Income needed for basic living expenses and the number of years required. • Income available from Social Security, pensions and other sources. • Extraordinary income or expense items that will affect your retirement capital. • Existing savings, investment, and retirement funds, as well as annual additions to the accounts. • The effect of inflation on income and expenses. • The rate of return you are able to earn on your accounts. • The effect of income taxes on your income sources and accounts.

In disbursing assets to satisfy income needs, assets are disbursed in the following order:

1) Investment account distributions 2) Pension/Social Security 3) Retirement account distributions

The following numbers are outlined year-by-year in the Retirement section of the analysis. The first set of number represents the Retirement Capital Projection page and the second set of numbers is listed on the Net Worth Report. The numbers represent the beginning year account values after all expenses have been paid from the prior year.

Daler Financial Analysis:

Age 55: = $1,875,542 Age 60: = $2,613,120 Age 65 = $2,501,008 Age 70 = $1,897,274 Age 75 = $923,615 Age 80 = $0 Age 85 = $0 Age 90 = $0 Age 95 = $0

Daler Alternative Analysis:

Age 55: = $3,192,613 Age 60: = $3,342,341 Age 65 = $3,828,590 Age 70 = $4,525,530 Age 75 = $5,293,203 Age 80 = $6,351,462 Age 85 = $7,503,264 Age 90 = $8,553,923 Age 95 = $9,338,904
Daler Alternative Analysis: net worth at age 65 equals $5,144,021.

A Monte Carlo retirement projection simulation was completed on each analysis that was generated. The following results are based on 1000 simulations. Percentage of results above zero in Daler Financial Plan is 1%. Percentage of results above zero in Daler Alternative Analysis is 87%.
Estate

The estate analysis is based on the size of your estate in the first year of the analysis. The following estate analysis is based on the Daler Financial Plan.

If Marke Dies First: All assets including life insurance: $3,664,969 Debts and expenses: (546,655) Net Estate: $3,098,315

If Cher Dies First: All assets including life insurance: $3,644,969 Debts and expenses: (478,291) Net Estate: $3,166,678

Estate Tax Liability: Simple Wills Credit Shelter Trust Gain Using Trust

Marke dies first: $979,157 $503,999 $517,658
Cher dies first: $1,013,339 $772,200 $262,546

The estate analysis is based on the size of your estate in the first year of the analysis. The following estate analysis is based on the Daler Alternative Analysis.

If Marke Dies First: All assets including life insurance: $3,994,636 Debts and expenses: (459,990) Net Estate: $3,534,645

If Cher Dies First: All assets including life insurance: $3,994,636 Debts and expenses: (422,746) Net Estate: $3,571,890

Estate Tax Liability: Simple Wills Credit Shelter Trust Gain Using Trust

Marke dies first: $549,976 $292,607 $281,830
Cher dies first: $568,226 $326,448 $264,553

The differences between the two scenarios outlined above centers around ownership of the life insurance policy. In the first estate analysis, life insurance benefits are included in the estate. In the second analysis, the life insurance policy is placed into a trust outside of the taxable estate. It is recommended that all life insurance policies except the group policies be placed into an irrevocable life insurance trust.
Commentary:
There are numerous strategies that can be implemented to reduce or eliminate the estate tax. One of the most cost-effective ways to reduce estate taxes is to have a current Will.

A Credit Shelter Trust can also help reduce the cost of passing your assets to your heirs. This is accomplished by arranging to have a portion of your assets placed into a trust, based upon the amount of your Unified Credit, at the time of death. Income from the trust can be made available to the survivor spouse, allowing the remaining trust assets to pass to the heirs at the spouses death without ever being included in the second spouse's estate. The Credit Shelter Trust will only reduce a portion of the estate taxes.

Other ways to reduce or eliminate estate tax is to establish a Charitable Remainder Trust (CRT) that will give off income each year for the life of your beneficiaries. Once your beneficiaries pass away, the remaining trust assets flow to a charitable organization. This strategy provides benefits for you beneficiaries and a charitable organization and reduces or eliminates estate taxes at the same time. An alternative is to establish a Charitable Lead Trust (CLT) that will disburse income to a Charity for a fixed number of years and then the assets flow to your beneficiaries.

An additional alternative referred to in the Risk Management section of the summary, uses a second-to-die life insurance policy for the payment of estate taxes. A life insurance trust is established so that the life insurance proceeds are not included in your estate. After the second death life insurance proceeds are used to pay any estate tax liability that is due or proceeds can be used to accomplish other personal goals and objectives.

Estate Tax Changes: The Economic Growth and Tax Relief Reconciliation Act of 2001 (which was signed into law on 6/7/01) includes equivalent exemptions for estate tax purposes as follows:

2002 & 2003: $1,000,000 2004 & 2005: $1,500,000 2006 to 2008: $2,000,000 2009: $3,500,000 2010: (Repealed) 2011: $1,000,000
Wills

Analysis of existing Wills is beyond the scope of this financial plan. However, your Will should be updated periodically as your personal situation changes and as estate tax laws change. The general information that follows may assist you in the preparation of your Will.

A properly drafted Will ensures that your estate will be distributed as you so choose. At the same time, the cost of probating the estate can be reduced. If you die without a Will, state statutes determine how your estate will be disbursed. The way that the state may disburse your estate may not be in the manner that you would desire.

A Will can also address your desires regarding life support, directives to physicians, and any donor-related objectives that you may have.

Due to the changes in the estate tax laws, it is recommended that your Will be updated to reflect theses changes so that it will achieve your objectives and reduce estate shrinkage. An attorney that is knowledgeable and experienced in this area can be helpful in explaining the options that are available to you.

Recommendations

There are many variables that will affect the results that are illustrated, such as actual rate of return that is received and annual expenses. The farther out you project, the less accurate the numbers become. The analysis does, however, provide an example of what could happen in the future based on a set of predefined variables.

As a result of the preceding analysis, several steps could be taken to maximize your financial potential, as follows:

1) Review assumptions used in analyses.

2) Eliminate all liabilities excluding the mortgage on the residence.

3) Invest a portion of the assets currently in savings into equities.

4) At retirement consolidated the nine equity accounts into three accounts. Roth IRAs and the variable annuity are not included in the consolidation.

5) Complete an analysis on the corporate bond portfolio to determine the most appropriate course of action. For example, what interest rate are the corporate bonds paying and are the bonds currently trading above or below their par value.

6) Reposition government bonds into equities.

7) Sell stocks immediately after stock options are exercised.

8) Examine limits of coverage on property and casualty policies.

9) Marke, maintain current disability coverage until retirement.

10) Meet with an attorney and establish an irrevocable life insurance trust.

11) Apply for a second-to-die policy for $1 million in coverage with a rider for $500,000 that would pays upon the first death. First-to-die rider is only good for the first four years.

12) Once the new policy is issued, cancel current coverage and apply $76,000 of the cash surrender values to the new life insurance policy. Use the remainder of the cash surrender values for personal expenses.

13) Consult with your attorney regarding present Wills or preparation of new Wills.

14) Review estate tax analyses and the effect that the life insurance policies have on your potential estate tax liability.

15) Update your financial plan periodically.
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[1] A basket of consumer goods purchased for $1.00 at year-end 1925 would cost $9.71 by year-end 2000. Of course, the exact contents of the basket changed over time. This increase represents a compound annual rate of inflation of 3.1% percent over the past 75 years. Inflation rates ranged from a high of 18.2% in 1946 to a low of -10.3% in 1932.

Over the last 20 years (from 1981 to 2000), the average annual inflation rate has averaged 3.6%. In the analyses, a long-term inflation rate of 3.6% is used. It is felt that a 3.6% annual inflation rate is more reflective of what inflation may average in the future.