Doctor

Background

Maria and her husband, Steve, are in their early 40’s. They want to know if they are on track to retire at age 55. They have done a good job maximizing their 401(k) contributions over the past few years and their Emergency Fund is fully funded. Their combined income is $700,000 and they have a good idea of how much they spend on a monthly basis.

Issues

Maria and Steve both purchased $1M whole life insurance policies when they were residents. They liked the fact they could build up a “tax-free” cash balance but they are not clear on the concept of how they access this money. They have been saving for retirement without a well-defined plan and they would like to review their tax return from last year to look for potential tax-savings.

Plan

First, we would gather all of their information and then run an analysis. This is done with the assistance of robust Financial Planning Software. In this case, we may start by looking at their Life Insurance. At first glance, it seems they are underinsured based on their current income and coverage amounts. But, we would run a detailed Life Insurance Calculation and ask them a series of questions to determine the appropriate amount and type of coverage to recommend. We do not sell any Life Insurance products which removes a conflict of interest. In contrast, Life Insurance agents who hold themselves out as “Financial Advisors” stand to earn as much as 85% of the first year’s commissions plus trailing commissions in subsequent years when they sell Whole-Life Insurance. It is important to understand how your Financial Advisor gets paid. When purchasing Whole-Life Insurance it is important to learn the process for accessing your cash value. In one case, you could borrow money from the policy but this is risky. First of all, you have to pay interest on the loan. Second, the policy could lapse if you borrow too much. This could lead to a portion of the proceeds being taxed as ordinary income. The next step would be to review their most recent Tax Return. Some companies offer ESPP, RSU, Restricted Stock, and/or options and it is important to understand how each of these are taxed in order to avoid double taxation. Finally, we would run a Retirement Analysis based on their current Financial Plan and look for ways to improve their outlook. We use a Risk Tolerance Questionnaire to determine an investor’s willingness to take risk. We take this process two steps further by comparing that Risk Score to the current portfolio Risk Score and determining how much risk a client needs to take in order to reach their goals.

Actions

If this were a real case, we might start by recommending Term-Life Insurance to help the clients fully insure themselves. We might recommend a certain amount of coverage based on their income, number of years until retirement, mortgage balance, and other goals. It is up to the client whether or not they choose to implement our recommended strategies. For example, we might recommend an additional $2M in term coverage for each of them but they may decide to only purchase an additional $1M each. The key here is that they have the information at hand to make an informed decision. We might also review their most recent tax return and notice they have a fair amount of short-term capital gains (STCG) which are being taxed as Ordinary Income (OI). We could recommend strategies to reduce this type of income. Finally, we would review their current Retirement Analysis Score and discuss potential strategies that could improve their outlook. The software we use can compare current plans to the various plans we propose.