Is Financial Planning Worth It?

Mr. & Mrs. Angst know that their household finances are important, but money stresses them out.  They have a strong desire to make sure they have enough for retirement and to pay for their son’s education, but don’t know where to start.  Like many who desire to lose weight but are overwhelmed with the concepts of diet and exercise, the Angsts often ignore addressing their financial issues until something bad happens.  They are frozen in fear of doing something wrong, and unaware that people are there to help.

Here is some info about the Angsts:

• Both parents work and make $75,000 per year, respectively, and pay 25% of their income in taxes
• The family spends $7,500 a year on healthcare expenses, but they do not elect to contribute to their family’s HSA nor do they itemize their tax deductions
• They put $25,000 in a savings account for their son’s college tuition ten years ago. It has grown to $25,500
• Angst has a 401k with a $100,000 balance and isn’t sure he is contributing enough for retirement
• Angst also has $25,000 in credit card debt at a 25% rate of interest
• Angst recently paid off his 3% student loan with a $10,000 bonus check he received from his employer.
• The Angsts each lease a new $35,000 car every year
• Neither of the Angsts make yearly contributions to a Roth IRA, but they put $5000 a year into a joint taxable brokerage account for retirement
• They each just bought universal life insurance policies from their local Prudential representative with $250,000 death benefits, paying $375 a month for the policies until death (I used data as of August 2020).

Even if you’re starting to feel overwhelmed, their financial life is fairly simple. If the Angsts were a financial planning client of WELLth, we would have:

• Contribute the maximum amount to their HSAs, saving $1,775 a year in taxes
• Put the $25,000 into a 529 plan (instead of a savings account) ten years ago using a special rule to avoid gift taxes, allowing it to grow tax-free by about $2,417 per year at a 7% rate of return
• Run a “Monte Carlo” simulation to determine whether the Angsts are contributing enough for retirement under a variety of circumstances and scenarios
• Categorize their credit card transactions and create a budget
• Take a one-year 401k loan to pay down the $15,000 in credit card debt immediately, saving the Angsts $3,750 in credit card interest
• Use the $10,000 bonus check to further pay down credit card debt instead of the low interest rate student loan, saving another $2,275 in interest after student loan interest tax credits
• Suggest the Angsts lease a new car every two years instead of every year, saving them $2,924 a year (I used a 20% first year, 15% second year depreciation rate and a lease payment calculator)
• Put their $5,000 contributions into a Roth IRA instead of a taxable brokerage account. At a 10% rate of return, this saves them at least $50 a year in taxes, with the annual tax savings growing over time
• Buy a low-load universal life insurance policy instead of the Prudential policy, likely saving close to $3,500 in sales commissions, marketing, and administrative expenses as well as an additional $100 each year in trailing commissions thereafter

With these actions, we will have hypothetically made the client better off via net worth increases, tax mitigation, and dollar savings by $16,616 in the first year.  WELLth would have charged this family $2,250 a year to engage in comprehensive planning services (it would be about $1,500 more if they wanted us to manage their investments too but that would be even more money made) – the price would be well worth it in either case.

That’s not all though. WELLth’s financial planners would also help provide the Angsts peace of mind.  For instance, they were concerned that they were not saving enough for retirement.  Now with an expert ready to help and crunch the numbers on their behalf, they can know with certainty they are on the right path.