Tag: yfp planning

YFP Director of Tax, Sean Richards, CPA, EA digs into what midyear tax projections are, why they matter, and specific examples where a midyear projection can help someone optimize their financial situation. We discuss the importance of adjusting withholdings, ensuring record keeping is up to date, common pitfalls business owners and side hustlers can avoid with a projection and tax considerations with student loan payments coming back online. 

Episode Summary

YFP Director of Tax, Sean Richards, CPA, EA is here to explain the incredible benefits of doing a midyear tax projection. Sean defines a midyear projection, illustrates how projections can lead to peace of mind, and clarifies why everyone should be doing their own midyear projections. Our conversation explores why being proactive is always better than being reactive, why proactive planning is necessary when making big life changes like getting married or buying property, or getting a new job, and a host of real-world examples that highlight the undeniable benefits of midyear projections. Plus, Sean describes how midyear projections can help with tax optimization and strategies for student loan repayments, and the wealth of opportunities that become available to business owners who embrace proactive planning. 

Key Points From the Episode

• A warm welcome back to the show to YFP Director of Tax, Sean Richards. 
• How he’s spending his free time post-tax season as a father of two under two.  
• Sean explains what a midyear projection is.  
• How projections can lead to peace of mind. 
• Why everyone should be doing a midyear projection for themselves, according to Sean.
• Real-world examples of the benefits of doing a mid-year projection.
• How being proactive is better than being reactive.
• Why proactive planning is a necessity when making big life changes like buying property.
• The role of midyear projections in tax optimization. 
• Exploring the opportunities available for business owners who do midyear projections. 
• How a midyear projection can help you optimize your student loan repayment strategy.

Episode Highlights

“A lot of people get stressed out about taxes, and I don’t blame them — when you’re in high school, you learn that the mitochondria is the powerhouse of the cell, but they don’t teach you how to file your taxes and do basic finance things.” — Sean Richards [04:52]

“At the very minimum, anybody who’s paying taxes and has a job and has to file a tax return at the end of the year should be doing some level of projecting the end of the year, to make sure that there’s no crazy surprises.” — Sean Richards [09:27]

“To the extent [that] you can mirror your tax strategy with your financial plan; it’s always just the best way to do things.” — Sean Richards [34:25]

Links Mentioned in Today’s Episode

• Subscribe to the YFP Newsletter
• Sean Richards on LinkedIn  
• YFP 309: Top 10 Tax Blunders Pharmacists Make 
• IRS Tax Withholding Estimator
• YFP Tax
• YFP Planning: Fee-Only Financial Planning for Pharmacists
• YFP Real Estate Investing Facebook Group
• YFP Disclaimer
• Tim Ulbrich on LinkedIn

Episode Transcript

EPISODE 318

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here, and welcome to this week’s episode of the YFP Podcast, where we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I welcome back to the show, YFP Director of Tax, Sean Richards. We discuss mid-year tax projections, what they are, why they matter, and specific examples for how a mid-year projection can help someone optimize their tax situation. We discuss the importance of adjusting withholdings, ensuring record keeping is up-to-date, common pitfalls that business owners and side hustlers can avoid with a projection, and tax considerations with student loan payments coming back online in a couple of months.

You can learn more about YFP tax services for both individuals and businesses, by visiting yfptax.com. Again, that’s yfptax.com. 

[INTERVIEW]

[0:00:50] TU: Sean, welcome back to the show.

[0:00:52] SR: Thank you. It feels like I was just here, but it also feels like it was just tax season yesterday. So I think things are all sort of blending together at this point, which is understandable given the rush of everything, and now that we’re in summer and all these other stuff going on, but I love being here. I appreciate you having me back on.

[0:01:08] TU: So, we’re post-tax season, you’ve got a new baby in the house, we’re gearing up for mid-year projections, which we’re going to talk about in this show. You should have ton of free time right now, right?

[0:01:19] SR: Yes. I really haven’t been doing a whole lot of anything, just kicking back on the couch, and kind of watching a lot of TV and stuff. It’s baseball season, so you get these games that you can just sort of put on the background and sleep all day. That’s basically what I’ve been doing. Yes, nothing really going on at work, at home with the new baby, and the other baby who’s under two. Two under two right now, so yes, a lot of free time. So if you’ve got anything for me to work on, please send it over.

[0:01:45] TU: I’ll keep that in mind. Two under two is intense. Yes, I remember, I shared with you our oldest two are separated by 17 months, and our other two are a little bit further spaced out. Two under two is the real deal, so kudos to you and your wife for making that happen. As you were talking about yesterday, I can remember very well. All of a sudden, baby comes in and your oldest, who still is relatively young looks much older all of a sudden, right?

[0:02:11] SR: Yes, she does look much older. But she also – and I swear it’s not just a comparison of or – I shouldn’t say the comparison, but now, we have a little one at home, so she seems older. But I swear, overnight, she went from being one and a half to being two and getting those terrible twos right in there. Because, man, it’s like you said, it’s intense. But it’s really exciting, it’s awesome. I mean, I couldn’t be happier with everything. But it definitely – it’s exciting challenge what I would say for sure.

[0:02:38] TU: Well, last time we had you on was Episode 309. We talked about the top 10 tax blunders that pharmacists make. That was coming off of the tax season. Here we are, end of July, people may not be thinking about taxes in the middle and dead of the summer, but we’re going to hopefully make a case of why tax is important to consider not just in tax season, not just in December, but really year-round. That’s our philosophy, our belief at YFP Tax, that tax planning, especially for those that have more complicated situations, when done well, is exactly that. We’re doing year-round planning, we’re proactive, we’re not as reactive. We’re going to talk about an important piece of that year-round approach, which is the mid-year projection today.

Before we discuss that midyear projection and some of the details and reasons of doing that, Sean, just define at a high level by what we mean by that term, right? We throw that around internally all the time, mid-year projection. All of our listeners certainly are familiar, hopefully, with filing taxes, but maybe not as familiar have experienced with a mid-year projection, so tell us more.

[0:03:42] SR: Yes. I mean, it really is. I mean, if you look at what it says, it’s a projection, right? You’re projecting out what you expect to have at the end of the year. Really what it is, is kind of like putting together your tax return now based on what you think it’s going to be at the end of the year. Obviously, there’s some variables there and some uncertainty with everything, as it always is with forecasting, and budgeting, and that sort of thing. That being said, given that there are uncertainties, there are things that you want to keep an eye on. So, yes, it’s really just doing a projection of your finances for the year, and really coming down to what we think your tax return is going to look like. Are you going to have a bill? Are you going to have a refund or not? Then, looking at that and working backwards to say, “What can we do to tweak things?”

[0:04:29] TU: If we go a layer deeper on that, Sean, why do one? What’s the case to have one done? What’s ultimately the goal that we’re shooting for here?

[0:04:38] SR: I think the goal, and I mean, you kind of alluded to before saying, people probably aren’t thinking about taxes right now, and that’s totally fair. I don’t expect people to be thinking about taxes right now, unless you’re maybe me or somebody in similar shoes as me. But, I mean, the goal is that a lot of people get stressed out about taxes, and I don’t blame them. It’s one of those things where I joke that when you’re in high school, you learn that the mitochondria is the powerhouse of the cell, but they don’t teach you how to file your taxes, and do basic finance things, right?

What generally happens is, you’re kind of – I don’t want to say sweeping things under the rug, but you’re not thinking about taxes, or it’s not top of mind throughout the course of the year. Then you get to the end of the year, and you’re doing your return. It’s all looked back, all historical. There’s not much you can do at that point, right? So if you’re filing your return next year, for this year, and you have a big refund, it’s nice to have a refund, but you’ve got all this cash all the sudden that you could have been doing stuff with last year or vice versa. You get to the end of next year, or the end of this year, you’re filing next year, and you have a huge bill. 

Whether you have the cash ready to pay it or not, it’s nothing that anybody wants to have, right? The idea of doing the projection now is that you’re not getting to a point where you’re stressed out, thinking what could have been, what should have been last year. You’re getting ahead of those things and saying, “Hey, right now, things look great. Don’t have to do anything, or things don’t look as good as they could be. Let’s tweak that.” Or maybe not even any of those. It’s just, “Hey, right now, we have status quo, but there’s some things that are changing in my life. I have a new job, or I’m thinking about opening up a rental property, or something.” And making sure you have those ideas in your head now as opposed to, again, in April and handing it to your accountant saying, “I forgot to mention, I bought that house last year. Oops.” 

[0:06:30] TU: Yes. I think with most things, and we’ll talk about some specific examples here. But most things when we shift to more proactive planning versus reactive, and obviously, for those that have more complicated situations, the more the proactive planning is going to help, and we’ll talk about that in more detail as well. But anytime we make that mindset shift, there’s an opportunity for peace of mind as well, right? 

I think a lot of people I talked to, Sean, when I say, “Hey, what are the opportunities? Are you thinking about opportunities to really optimize tax as a part of your financial plan?” Everyone’s like, “Yes, I want to do that. I want to make sure that I’m paying my fair share, but no more.” But then actually, executing on that. It’s like this cloud of not exactly sure what to do, how to best navigate it. I think that is the opportunity with the year-round planning. Ideally, we’ll make the case of why it’s important to have a CPA in your corner throughout the year as well. But I think that peace of mind part is just such an important piece, especially for many pharmacists, I know that have this lingering question of like, “Am I doing everything that I can?” 

There’s the cleanup part where maybe we’ve made mistakes, or we don’t want to have a big bill or refund, but then there’s the second layer of that, which is that nagging feeling of like, is there something else I could be doing? I think that’s one of the values of projection.

[0:07:49] SR: Yes. I mean, the peace of mind thing, like you said, is that I feel like going back to the whole high school idea of how they don’t teach these things to a lot of folks. I remember getting my first job out of college, and I had an accounting, and finance, and even tax background from college. You start getting these things, “Hey, do you want to do an HSA? Do you want to do 401(k)?” There’s ROTH and traditional, there’s IRAs, and everything, and people are like, “I don’t know what any of this stuff is. I’m just – I’m getting a nice paycheck for the first time now. I know I want to save, but I don’t know what any of this stuff means.” It becomes overwhelming to have all these things happen. 

Like you said, you don’t want to come to the end of the year and say, I wish I had done these things. Because I didn’t know that that – there were opportunities for me to save here and there. I just thought that I was doing the right thing by putting my money in this savings account or in this account. So yes, I think, again, the uncertainty, and just sort of lack of general tax knowledge in the country, and world can be stressful, and not having to worry about that is very important for peace of mind in general sanity.

[0:08:55] TU: To be fair, the process is more complicated than it probably needs to be. And because of those complications, there’s some of the ownership and work on us to be planning throughout the year. One of that part piece, of course, would be the mid-year projection. Sean, I have to admit, prior to really building our tax team over the last several years, a mid-year projection was something that was never on my radar. My question for you is, should everyone do a mid-year projection? Is this necessary for everyone?

[0:09:26] SR: I think it is. I think at the very minimum, anybody who’s paying taxes, and has a job, and has to file a tax return at the end of the year should be doing some level of projecting the end of the year to make sure that there’s no crazy surprises. You might be listening to this and saying, “Hey, my situation is really simple. I filled out my W-4 when I started my job. I don’t have any crazy stuff going on. I don’t think I really need to do this.” But again, we keep coming back to this peace of mind thing and that could be great. Maybe your return last year was fine, and there’s not a lot of stuff that’s changing, but there’s always changes to the tax law. I mean, the W-4 system changes all the time, and I know it’s not – people don’t even realize, “Hey, can I claim one or two exemptions?” That’s not how it works anymore.

There’s always changes to the law, and changes to things going on. Even if you think your situation is pretty simple, and doesn’t apply to you, just doing a quick check to make sure, “Hey, there’s not going to be any crazy surprises.” Again, with something like that, you’re not necessarily going to be saying, “Oh, am I taking advantage of all the laws that exist out there, and all the different ways to maximize my tax savings?” But you just want to make sure. “Hey, am I going to owe a ton of money to the IRS at the end of the year? Or am I going to get a ton of money back that the government was borrowing for me for free for the entire year?” What I would say is, if your situation is simple, you can even just go on the W-4 calculator that the IRS provides. It’s not perfect, please. No one from the agency come and chase me down. It’s not a perfect system, and there’s a couple of different things that can happen there.

You might go through the whole process and get a bad answer, and then say, “Well, what am I supposed to do with this? It just says that I’m going to owe a lot of money, but I don’t know how to fix that.” Or you might just use the tool, and like I was alluding to, you might just get frustrated with it and say, “Why all these questions they’re asking me? I don’t understand any of this stuff. Why is it so complicated?” It is a good starting point, I would say, especially for those with simple situations. But I would just advise to be wary when you’re doing it that. It’s not a perfect system, and it definitely can be a little confusing.

[0:11:34] TU: Yes, and I’ll be honest. Admittedly, I’m a little bit impatient, and want these tools to always be better than they are. I’ve been on the IRS W-4 calculator tools, and I’ve gotten annoyed, frustrated playing with that, and I’ve left. I think the decision tree to your point, for people that have a very simple tax situation, can they do it themselves? The technical answer is yes, there’s an IRS calculator. It’s going to give you some basic information. The follow-up question is, do you want to do it yourself? Then the follow-up question to that is, if you have a more complicated situation, and/or you’re looking for more input of advice based on the output of that number, that’s really where some of the assistance and help that can come in from working with professionals. 

We’ll link to the show notes to the IRS W-4 calculator. Certainly, people can play around with that, which I’d recommend regardless of working with someone else. Just have a better understanding of the different inputs in these numbers, and hopefully to get the conversation started as well.

[0:12:33] SR: Yes, absolutely.

[0:12:34] TU: Let’s talk about some common examples where a mid-year projection can help. You’re in these conversations every week with our year-round tax planning clients. We talked about several these in Episode 309. Again, we’ll link to that in the show notes. That was a top 10 tax blunders that we see pharmacists making, which we recorded after the tax season. But I think there’s an opportunity here really to bring to life, not just the academic or theoretical side of why a video projection may be necessary, or what it is, but some actual examples where a mid-year projection can help. I’ll turn it over to you to talk through some of the most common places where you see this having value.

[0:13:11] SR: Yes, sure. I would say, the number one thing probably is just adjusting withholdings in a very – to put it in two words, it’s adjusting your withholdings, or adjusting withholdings, get rid of the “your” and “there.” But I swear I’m better at math than I lead on when I do these things. But yes, it’s adjusting withholdings. Like I said, the W-4 system changed a few years ago. Some people don’t even realize that. Some people probably set up their withholdings 20 years ago, and they started a job, and haven’t done anything since then. That might work for some folks, but the way that the W-4 holdings works now with the IRS is, if you get a new job, or your spouse gets a new job, or you have changes in salary, and everything, your withholdings might not be working the way that they did in the past.

You can also have other life events that sort of throw a wrench into that. You can get married, have kids. Even if you are married, you can kind of consider, and we’ll talk more about this when we get into some of the other blunders, but consider whether you’re going to file separately or file jointly. That changes the way you do withholdings and everything. That’s probably the number one area. Like I said, not withholding properly at the end of the year is almost certainly going to cause a problem whether it’s you’re over withholding, and you’re getting that big refund back, or you’re under withholding and you have a big bill.

The biggest and easiest way to kind of course correct. If we do a projection and we see that that’s the case, submit your W-4 to your employer, all of a sudden, you’re withholding appropriately. We can do a catch up to get you to where you need to be, or make an estimated payment or something like that. But I would say that’s the number one thing, and it sort of encapsulates everything else. Not entirely, but just because holding down a W-2 job and getting the taxes taken out of your paycheck is the way that most folks are paying the IRS. I would say, that’s probably the biggest one.

[0:15:04] TU: Let me jump in real quick, Sean, before you move on to other common examples, because that one is so common. I just want to highlight, when you think about the situations where withholding adjustments are necessary, you mentioned individuals getting married, and need dependents, I think about people that are moving different locations. They’re buying homes, new job, changes in income. These are things we see all the time. The key here is, we want to give ourselves as much time as possible to make a pivot, or a change on either side of this. We find out that, “Hey, because of X, Y and Z, we’re anticipating a big refund. All right. Let’s start making some adjustments, so we can put that money to work in other parts of the financial planning.”

We find out that we’re going to have a big liability due. Well, we just bought ourselves some more time to kind of budget, and plan before that payment is going to become due, and to make those adjustments. That’s so important, because this is the phase of life where we least want a surprise, right, especially on the O side of things, right? Getting married, moving, new job, new house, expenses that come with that. We want to avoid as much as possible, the surprises that are going to put a wrench in the other part of the financial plan. 

I think withholdings, adjusting withholdings, we all are familiar with. You take a new job, you fill out the paperwork, but I think we can lose track of that throughout the year, or when those job changes aren’t happening. Just wanted to drive that home further.

[0:16:26] SR: The two things I would add to that are also – the big thing is that people are always excited about getting their refunds, right? If you get a big refund back, it’s cool. It’s almost like you found the $20 bill in your pocket, and went to the washing machine that you didn’t know about. But would you rather find out about a refund in April and get the cash back now, or find out now that you’re going to be getting that refund back, and then be able to actually put that in a savings account, or deploy it somewhere where you can get a return on it, as opposed to getting that cash back in a few months with nothing, right? It’s like a net present value sort of thing to borrow finance term. But would you rather get $10,000 in six months or $10,000 now? The answer is now, right?

[0:17:09] TU: Especially with where interest rates are on high-yield savings accounts and other things.

[0:17:12] SR: Exactly. I mean, any way that you can get a little bit of extra cash now as opposed to tomorrow, or anytime in the future, it’s better. Then the other thing that I would say, I keep going back to the whole W-4 withholding thing, is that you might be perfectly fine at your job and nothing has changed. When I say perfectly fine, status quo, right? You’re working the same job, standard raises every year, nothing crazy going on. But with the way the W-4 systems work now, if your spouse goes and gets a new job, and they update their W-4, but you don’t do anything on your end, that can mess things up. People don’t realize that. They’re thinking, “Hey. You go and claim the exemptions that you’ve always claimed in the past.” We have one kid, or two kids, or whatever it is, but that’s not the way it works anymore. 

Even if it’s not you that’s had changes to your life, specifically, you have to think about your entire family and everybody who’s landing on that tax return at the end of the day. That’s one thing that definitely slipped some folks minds, I would say.

[0:18:05] TU: Great stuff. So just withholdings, I’m hearing you loud and clear, probably the most common thing that we see. It’s one of those things that big impact, but not a huge amount of work to be done to make this pivot. That’s a low hanging fruit. Talk us through other common examples where a mid-year projection can really help.

[0:18:24] SR: One good one is, this is another kind of, “Hey, this comes up every year with tax and filing is record keeping.” So we get to the end of the year, you purchased a rental property, and you’re excited about it, you’re getting some cash and everything. And now it’s time to file taxes. Instead of just your typical, “Hey, Sean, or Mr. CPA, here’s my W-2, and here’s my 10-99, and I’m good to go.” You have a rental property now. There’s a lot of things that need to go into something like that. You might not be thinking about some of the ins and outs that happen with that. I mean, if you have improvements to your property, those are treated differently than if you have electricity costs that go into your property. There’s a lot of different things that people don’t think about.

It’s not even that people don’t think about it, you don’t want to be scrambling at the end of the year to say, “Ah, I got to go get all those receipts, and get all my finances together and all that stuff, and try to get pulled all together when everybody’s trying to all do the same thing.” The extent you can get ahead of that now is great, obviously from a getting your ducks in a row and helping your CPA out at the end of the year. But also, going back to this whole idea of what am I going to owe at the end of the year? If you’re able to come to me or whoever you’re working with and say, “Hey, here’s the settlement statement for the house that I just bought. Here’s all the details. Here are all the closing costs and everything. Can you build that into my projection?”

The answer is absolutely yes. I’ll run that through and see what your rental is going to look like for the year or anything. It doesn’t have to be a rental property. You can be starting a side business, or doing anything like that. But just having this stuff together gets you ready for the end of the year, but also allows us to be able to, again, do those calculations to say, “Hey, you know, that rental that you built, or that you just bought, and you just did that big addition on? Well, that’s going to save you in depreciation this year, so you’re going to get a refund back. Let’s redeploy that cash.” Maybe you put it back into the rental property, I don’t know. But now we have the opportunity to do something with it.

[0:20:27] TU: I’m so glad you mentioned this one, because we are seeing a larger and larger part of our community that’s jumping into real estate investing. We’re seeing a larger percentage of our community that’s jumping into a side hustle or a business. Just so important, and we’ll talk about other things for business owners here in a moment to consider. But what we’re trying to avoid – not that this ever happened, Sean. But we’re trying to avoid is, hey, we get to tax filing, and you ask for the information come February and March. It’s like, “Oh, yes. By the way, I bought a rental property eight months ago. Can you figure this out right for me tomorrow?” Again, proactive planning.

[0:21:05] SR: Now, that example, “Hey, I bought a rental property last year, I forgot to mention it to you.” People might be rolling their eyes saying, “Okay. Well, if you work with an accountant, who is not going to tell their account about their rental property?” Sure, that’s totally – that might be unrealistic to some folks, I get it. But we’ve seen plenty of circumstances where folks have been, say, living in their house for 20 years. They decide, I’m going to rent out a couple rooms in the house this time for the first time. Hey, that’s awesome. Get some side income, be able to write off some of the expenses. It’s great. You’ve been living in this house for 20 years. We need to start taking depreciation on this house for rental, we need all the costs for the last 20 years that you put into that thing. 

I mean, I know now some people might be sweating saying, oh, boy, that’s a lot of look back, right? But it’s something that’s going to need to get done anyway, so we rather get ahead of it now or have me looking for that in April, right?

[0:21:55] TU: Yes, good stuff.

[0:21:56] SR: A little bit of a different example there. But hopefully trying to get some people thinking about things.

[0:22:01] TU: Yes. I think, just a proactive, when people are starting, I’m thinking about a lot of individuals in our community that are new real estate investors, first property. So I’m not sure, number one thing on their mind, especially if they’re not yet working with an accountant would be thinking about a lot of the record keeping and get ahead of the proactive tax planning. Now, if they’ve worked with an accountant, or they are multiple properties in, different situation, the trigger goes off. Similar if you’ve been in business for a while, the light bulbs go off more often, like, “Oh, yes. I got to talk to the accountant about this.”

What about opportunities for tax optimization? One of the things I think about with a mid-year projection is, “Hey, we’ve got an opportunity.” Again, proactive not reactive, to really look ahead and say, “Hey, there are the things that we can be doing to pay our fair share, but no more, and optimize their overall tax situation.” Tell us more here.

[0:22:51] SR: Yes, and this one’s good, because it applies to everybody in a very broad spectrum of things, depending on what you have going on in your financial life. That could be something where it’s as simple as, “Hey, I’m working a W-2 job, my spouse is working a W-2 job, we don’t have any kids, nothing else really going on. What can we do to optimize our taxes given our situation?” That’s a perfect example of where it’s an awesome time for your accountant and your financial planner to sort of work together. Because there’s always the idea of, “Hey, we want to maximize our tax savings, but we have a life. We need to be able to have cash to pay our bills and do other things too.” It’s a very delicate balancing act of, “I want to maximize my tax savings, but at the same time, have enough cash to do all the things that I need to do.” It’s a perfect time to work with both your accountant and financial planner to say, “Hey, should I put more money into my HSA? Should I put money into a 529 plan? What kind of thing should I be doing with my extra cash? That opportunity cost of $1?” 

But you can also have more, I say, more fun examples, because it’s the ones where you can really think about different opportunities that are out there, and how to take advantage of these laws. An example of that would be, say you have a side business, and you need to buy a new vehicle. There’s so many different things that you can do with that. I could spend an hour maybe. We’ll have a separate podcast on buying a vehicle in the active locations of doing so. I mean, get side business. Hey, how much are you going to be using this thing for business? Are we able to take a section 179 deduction? Is it a type of vehicle that would qualify for something like that?

We have all these new EV credits with the inflation Reduction Act. Are we going to be able to take advantage of all those? What if we use it for business? Can we still take the credits and everything? That might be a little bit of a nuanced example to some folks, but it’s a perfect example in my mind of how something that is, maybe on a day-to-day thing that happens. But something that purchase that folks are going to need to make in their life, most likely. You can really use that as an opportunity to say, “Hey, I got to do this anyway.” How can I also maximize my tax savings at the end of the day, when you’re sitting in a car dealership, and the people are trying to sell you on all these different tools, and upgrades, and everything. You’re probably not thinking, “Hmm. I wonder if I can save my taxes with this purchase?” But it’s always possible.

[0:25:15] TU: I’m going to give credit to our community. I think they are asking that question, Sean. 

[0:25:18] SR: They are, for sure. I’m getting that one a lot. In fact, I would be – I challenge you to find another community that’s as interested in the EV craze right now, which is awesome, I have to say. Really, folks should be looking more and more into that, because of those credits I just mentioned. They’re just every year getting better. But yes, I love it. I mean, every year I’m seeing more folks buying EVs, or buying used EVs and getting the credit now. It’s good stuff.

[0:25:46] TU: So, as we continue talking about some of these common examples where mid-year projection can help the other one that I think about, Sean, that we’re seeing a lot more of is, business owners, especially new business owners, right? Maybe they are thinking about tax considerations, withholdings, making sure they’re making quarterly estimated payments if they have to. What’s the opportunities here with the business owners as it relates to the mid-year?

[0:26:11] SR: Well, this is where I say, take all the examples I was just giving you, and throw them out the window. Not exactly, but when I was talking about how adjusting your withholdings is such an important part of this entire thing – I shouldn’t say throw out the window, because they do definitely go hand in hand. But if you’re a business owner, you have a side gig, you’re making money doing that, you’re almost certainly not getting W-2 income from that job. Or I shouldn’t say, you’re almost certainly not, but there’s a good chance you’re getting income from that business that is not having taxes withheld on it.

That is probably the number two or number one and a half blunder that we see where folks have these businesses. They’re not setting aside cash. They get to the end of the year, and are excited to give me the P&L that shows, “Hey, look at all this money I made.” Then I say, “That’s awesome. You owe some money in taxes, do you have that ready to go?” And it’s like, “Oh, I wasn’t thinking about that.” It goes hand in hand with the withholding, but it’s really just hey, let’s look at the business right now. Where are we mid-year? What’s your P&L look like to date? What kind of expenses do we have coming up for the rest of the year?

I talked about these EVs and things. How can we think about maximizing your savings there to reduce your business income, and be able to say, “All right. Well, at the end of the year, we’re expecting that we’re going to have $10,000 in business income.” Being able to say that now, and make your estimated payments up to the IRS is not only a good thing, it’s actually what you’re required to do per the law, right? That’s where I would say that a projection isn’t a nice to have, but an absolute necessity if you’re a business owner. It’s something where you can’t really say, “Hey, I’ll think about this later, or let’s just hope the chips fall in a good spot.” You really need to be doing a projection now to say, “What am I going to owe? Do I need to pay estimated taxes now? Should I have been making estimated quarterly payments up until now? Maybe I need to do a little catch up to hopefully not have a penalty at the end of the year at this point?” But again, to any extent you’re able to get ahead of that now, when I’m looking at the calendar, it says July versus December, January, April, it’s always better.

[0:28:25] TU: Yes. Especially, Sean, think about those new business owners again. Where, often, there’s excitement around the growth, there’s a reinvesting of any of the profits that tried to continue to grow the business. If we can identify some of this mid-year, sometimes that even inform some of the business strategy of like, “Hey, are we charging appropriately? What’s the service model look like?” And making sure that accounting for taxes as I look at the bottom line, and making sure we’ve got cash on hand to do these other things, and of course, not being caught off guard as you mentioned, as well.

[0:28:59] SR: Yes. To give – I don’t want to say a very specific example, because it’s something that we see very, very often. It might seem specific to some folks, but I think a lot of people here will resonate with this. But big one is, business owners, especially first-time business owners paying themselves. A lot of folks will do that, and then they’re maintaining their records and saying, “Hey, my net income is going to be pretty low at the end of the year, so I don’t have to worry about estimated taxes or anything like that.”

Then, we get to the end of the year, you provide your P&L, and I say – actually those $10,000 that you paid yourself, it’s not really a salary expense of the business, because it’s just a sole proprietorship. It’s actually just taxable income to you whether you took the cash or not. That can be very eye opening in a bad way for a lot of folks at the end of the year. It’s not entirely intuitive to think of it that way. You might be thinking, “Well, I worked with the business, I’m paying myself. Isn’t that an expense?” In the eyes of the IRS, depending on the way you’re set your setup, it may or may not be right. Getting ahead of that now and having your accountant maybe give you that bad news of, “Hey, that money is actually something you’d have to pay taxes on the end of the year now so you can plan ahead.” — Is always better than getting that during your tax review meeting in April or May

[0:30:14] TU: Yes, and I get it. For the small business owners, we were there several years ago. For the small business owners that are just getting started, you’re looking at working with a CPA, it’s another expense in the business. I get it, right, but it’s going to pay dividends when you talk about making sure you’ve got the right entity set up classification, separate conversation for a separate day. Making sure we’re withholding correctly, getting financial statements set up correctly, making sure that we’ve got the books in good order. These are all going to be critical components to building a healthy business. You’re not going to get all of it right as you’re getting started, and that’s okay. I think some of that is natural. But making that investment, and building that in as an expense of the business from Jump Street as a part of just doing business to make sure you’ve got all of that in order is going to be really, really important. 

[0:31:05] SR: Right. It’s not just a nice to have, like I said, it’s something where that should be part of your plan from the get go, and you’re building this out. People might be thinking about, well, “Hey, isn’t this podcast supposed to be about doing a mid-year projection? Why are we talking about what my business looks like? That’s kind of different than my taxes, right?” But like I said in the beginning when I was explaining what a projection is, you’re really just basically doing your tax return for the end of the year with the information that you have on hand. One of the lines right there is, “Hey, what’s your business income?” If you want to do a correct projection for your taxes, you’re going to actually have to do a projection for your business as well. Even though it might seem like it’s going a little bit too far, or you might not be able to connect those dots there, it’s something that it’s absolutely intertwined and something that you need to do for sure.

[0:31:51] TU: Last but certainly not least on our list. What would be a YFP episode if we didn’t talk about student loans? We’ve got student loans coming back online here in a couple months. A lot of questions that are coming up related to the restart of those payments. We’ve talked at length before about how tax and student loans can certainly be intertwined, depending on one’s loan repayment strategy. What is the value or potential value here, Sean, for someone that’s optimizing, or looking to optimize your student loan repayment strategy, and where the mid-year projection can play a role?

[0:32:24] SR: Yes, I can’t take any paternity leave anymore. Because when I do, it seems like they announced all these student loan changes, and everybody’s all excited and wants to talk to their CPA, and I’m sleeping on the couch with the kids and everything. So lesson learned there. But yes, absolutely. This is another example that I would say is a perfect example of where mirroring your tax strategy and working with a financial planner, or whoever manages the finances in your household and does the budgeting and everything is absolutely instrumental in making all this work together. 

Yes. I mean, with student loans, there’s a lot of different things that can happen there. People have been asking me about, “Hey, so I’ve heard that you can file separately, or file jointly, or do these different things to maximize, or I should say, maximize savings, minimize my loan payments, or my spouse’s loan payments.” Yes. I mean, that is something that you can make that decision when you’re doing taxes to say, “Hey, am I going to file separately or am I going to file jointly?” But it all goes back to that idea of withholding and making sure that you were know how that works. Most of our clients who aren’t doing the student loan thing that are married, generally, are filing jointly. That’s what you’re told from the get go, right? “Hey, you get married, you file jointly, you get all the benefits of doing it, it’s the best way to do things.”

For someone to come and tell you, “Hey, actually, going forward, filing separately might be better for you.” Not only is that shocking for some folks to hear or like a complete change of what they’ve been told throughout the course of their life, but it also changes how they need to do withholdings and how they need to think about credits that they might have, whose return is that going to land on, and just one spouse withholds a little extra and recognize at the end of the year, they might get a refund that offsets their spouses tax bill or something like that.

There’s a lot of things that you want to make sure that again, even though you think that might be something you can make that call at the end of the year, just given all the different stuff going on with the loans, being on top of that now, and trying to minimize those surprises is always a better thing to do. To the extent you can mirror your tax strategy with your financial plan, it’s always just the best way to do things.

[0:34:31] TU: Great stuff. As always, Sean, as we wrap up this episode talking about the mid-year projection and the role it can play in some of the areas where it can effectively be utilized. Let me encourage folks to check out the resources and services that we have available, yfptax.com. We’ll link to that in the show notes. We have individual year-round tax planning led by Sean. As well as for those that do own a business, bookkeeping to fractional CFO, as well as some of the business tax planning that’s associated with that. Again, yfptax.com, you can learn more, you can schedule a call with Sean as a discovery call to learn more about that service, and whether or not that’s a good fit. Sean, thanks so much. Appreciate it.

[0:35:13] SR: Thanks, Tim. Talk to you soon.

[END OF INTERVIEW]

[0:35:15] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide, and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. 

Furthermore, the information contained in our archive, newsletters, blog post, and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacist unless otherwise noted, and constitute judgments as of the dates publish. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.

For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist podcast. Have a great rest of your week.

[END]

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The team at YFP Planning discusses a case study that includes balancing student loans, a wedding, home buying, and saving for retirement.

Episode Summary

Welcome to our seventh installment of the case study series with Tim Baker, CFP®, RLP®, Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®, and Angel Melgoza, MS CFP®. During this episode, we are sharing a fictitious case study with you about an engaged couple in their 20s. We delve into their finances, expenses, and their goals before discussing their assets, savings, investments, liabilities, and debt. Angel and Kelly discuss why they would tackle student loans before anything else in this couple’s financial plan, how recent changes announced to student loans will impact their loan repayment strategy, how marriage, children, and other big life events affect financial planning, and the importance of emergency funds and savings. Finally, we talk about why wealth protection is so important and why we see clients struggle with that the most.

Key Points From the Episode

• A warm welcome to today’s guests, Kelly Reddy-Heffner and Angel Melgoza. 
• Some details of the fictitious case study we will be discussing today. 
• The first thing they would tackle with regards to this fictitious case study. 
• How Biden’s bid to forgive some loans will affect the power of PSLF. 
• How financial planners work with clients on massive life events such as marriage and children.
• The importance of having an established emergency fund and focusing on savings. 
• Why clients struggle most with wealth protection and why it’s imperative. 

Episode Highlights

“Figuring out a strategy is key to the plan.” — Angel Melgoza [0:11:48]

“Our clients need cash flow because – the goal is to pay off – the loans – sooner rather than later.” — Angel Melgoza [0:11:58]

“Clients do need to be candid about their goals and one of our objectives is to help clients do what they want to do within those realistic [goals].” — Kelly Reddy-Heffner [0:24:09]

“Layers of life typically influence how much [wealth] protection is needed and how comfortable you feel with what you have.” — Kelly Reddy-Heffner [0:30:36]

Links Mentioned in Today’s Episode

• YFP Planning: Fee-Only Financial Planning for Pharmacists
• Kelly Reddy-Heffner on LinkedIn
• Angel Melgoza on LinkedIn
• Tim Baker on LinkedIn
• YFP Planning: Fee-Only Financial Planning for Pharmacists
• YFP Disclaimer
• Subscribe to the YFP Newsletter

Episode Transcript

[INTRODUCTION]

[0:00:00.4] NH: What is up everyone? Welcome to our seventh installment of our case study series. I am joined by Angel Melgoza and Kelly Reddy-Heffner. Guys welcome back. We have a great case study to talk about today. How is everything going? Angel, Kelly, what’s going on in your worlds?

[INTERVIEW]

[0:00:18.2] AM: Trying to keep up with the heat, trying to stay cool here in Texas. We’ve hit triple digits though, making sure my AC is still working.

[0:00:25.9] NH: How about you, Kelly?

[0:00:27.5] KRH: Yes. I know, what’s up with all the weather and weird things? I am avoiding the outdoors due to smoke infestation and hoping some Canadian wildfires get put out soon.

[0:00:39.7] NH: Yeah, our very own Paul Boyle sent out some pictures of where he’s at in Ohio and some of the smoke that’s coming down from the Canadian fire. So definitely has some air quality issues here in Ohio and Angel, I am with you. I am not in Texas, our case study today is actually in Texas.

But our AC is on the fritz and right now, we are kind of battling with our home warranty people to try to figure that out. So hopefully, we get that figured out before the hot temperatures get here to Ohio but good to have you guys on, and looking forward to run in through the case study here.

So what we’re going to do is we’re going to kind of go through the case study and then obviously, if you’re listening on the podcast, we’re going to talk through this as best we can. If you’re watching this on YouTube, you’ll be able to kind of see the case study as we walk through it. So we’re really going through it.

This is a fictitious couple, they are an engaged couple living in Texas and Angel will kick us off, and then Kelly, we’ll kind of go through some of the goals. I’ll go through the balance sheet, and then we’ll just kind of look at this case study, what are some of the things that pop out to us, and how we would approach this from a planning perspective.

So, Angel, let me share my screen. So the people that are watching can see this. Let me see right here, share. So without further ado, Angel, why don’t you take us away as this pops up here?

[0:02:00.4] AM: Let me kick it up, these are my fellow Texans, right? Even though they’re a little fictitious. So we have Meghan Myers, who is aged 29, is a clinical pharmacist. Mathew Higgins, age 27, he’s an IT tech. You know, pretty typical age of current clients that we have, right?

Salaries for Megan, she’s earning USD 150,000 annually. Mathew’s earning USD 100,000 annually with supplemental income, USD 10,000. I’m guessing that may be some add-on work that they’re just taking on. Currently, of course, single. Filing single but they are engaged to be married.

See, they’re residents of Austin Texas, five hours north of me. Tell me you’re Texan by not telling me you’re Texan. You mentioned this in five hours and not by having on debate. So on a combined gross income front, they’re both earning, combined 260,000. 

A little bit about their expenses, we try to divvy up fixed variable and poor savings as well. From expenses standpoint, the fixed expenses or about 32.50 monthly, USD 2,000 on variable, and about 1, 242 in just savings commitments that they have.

[0:03:11.3] NH: Awesome. Kelly, why don’t you go take us through Meghan and Mathew’s goals?

[0:03:15.6] KRH Sure, so I have reached out to do some financial planning because they’ve got a couple of things on the horizon. There are some student loans, which is not uncommon for our client base and we know there’s been a lot of chatter all summer about student loans and finally, some of the next steps are starting to unfold. So that’s often a prompt to reach out and start a conversation.

So they want to have a plan in place for Meghan, she does work for a qualifying 501(c)(3). So PSLF and a forgiveness strategy is part of the conversation. They are planning to get married so honeymoon, wedding expenses, we know one of the inflation items that’s still up is travel. So they’re planning a very fun honeymoon, it is good to plan ahead for that and as far and advance as possible. 

They are looking to make sure that retirement’s on track and feel like they’re a little bit behind. Also, again, not an uncommon feeling. So that’s one thing we will want to dive into and see what that looks like, try to come up with a student loan plan that also matches a strategy for some of those other goals like wedding, marriage, and retirement and then of course, big things with life in general, often include that first home purchase. 

We know that’s been an interesting environment as well, so we’ll kind of talk through what the home purchase environment looks like, what the resources are available to expand, and be knowledgeable about that big, that big purchase. Children, not too far down the road as well, and then of course, vehicles, open to the conversation about owning versus leasing but do identify having a new car need in the next couple of years as well.

[0:05:09.2] NH: Yeah, good stuff Kelly. Thanks for taking us through that. So I’m going to go through kind of the balance sheet, the net worth statement. So I’m going to start on the asset side. So they have about USD 5,000 in checking and joint checking. USD 20,000 in joint savings. When we look at their investment accounts, they both have 401(k)s. Meghan has about 10,000 in her current 401(k). Mathew about 15,000 they’re both in target date funds. 

About 90% in equity, so probably goes 20, 60 target date funds that are out there. Currently, they’re both putting in 5% but Mathew actually gets a match up to 6%. Meghan’s is 5% so that’s a plan and opportunity right there. Meghan has a little bit of money in her HSA, USD 2,000. I mean, she’s contributing the max to that and Matthew does have access to an HSA because he’s got a high-deductible health plan but he’s not getting enrolled. 

I believe Mathew has a Robin Hood account that has about USD 5,000 and he’s putting about USD 200 a month into that and then Meghan is not sure what to do with her old 401(k), which has about 5,000. So total assets of about 62,000. On the liability side, so these are the things that we owe, it’s a little bit of short-term debt there, about USD 5,000 on a credit card for Meghan, USD 3,000 on a credit card for Mathew. 

They try to pay that off monthly, Mathew does have a car note that is USD 250,000 per month at an interest rate of 4%. So we’ve seen those obviously go up recently, so not terrible, right? In this environment and then the big, you know, monstrosity there I think are the loans. So she has about USD 425,000 in loans between her private and her federal loans. So total liabilities of 453,000. 

So that puts their combined net worth at negative 391,000. So just to reiterate, they’re doing their own taxes now. So definitely, something that we would look at as we’re looking at the student loans, and then we do have a section here for like wealth protection. Meghan does have group life insurance coverage so two times her salary at USD 300,000. Mathew has one and a half times so $150,000. 

They both have, you know, kind of a standard work term and long-term disability policies through their employers so own-Oc for two years and any-Oc after that and then professional liability, Meghan does have her own policy, which is good to see, and then no estate plan at this time, so definitely something to look at. So to kind of reiterate, Meghan hates the loans and wants to see them gone but is open to hear about PSLS. 

So that would definitely be something that we would want to walk through and show her the math. Mathew again doesn’t have any loans, student loans. They are looking into stopping and funding the taxable account and put those dollars towards debt, and then as Angel mentioned, Mathew does have some contractor work that he makes on the side. So as we look at this, Kelly, what would you say is the first thing that you would tackle with this particular client as you review the case study here?

[0:08:08.7] KRH: Well, I’m going to assume that probably, the prompt was the student loans to get that plan in place. So there are a couple of little low-hanging fruit items but they all do work together like pieces of a puzzle to fit. So I guess that would be where I would start to just have an idea of what that monthly payment would be so that we can build the rest of the plan around that.

[0:08:35.9] NH: Yeah. I mean, I think, for a lot of our clients, you know, the tail that wags the dog for their financial planning is the student loans. So as the loans go, so does the rest of the plan. So if we’re talking about this amount of debt, I think again, it’s not necessarily a push to pay them off. But more of a push to have a plan to pay them off.

So I think you know, one of the things and I’ll skip over to this tab here and that kind of outlines the student loans, I think really with this particular client, you have lots of moving pieces here. You’re probably going to have a strategy that is related to the federal loans and then a strategy that is related to the private loans.

I think the thing that I often say is that the range of outcomes here with regard to the loans can be vast and if you’re looking at our tab here, the total amount paid, and this is kind of the rough numbers given the present student loan plans that are out there, is anywhere from 143,000 to 480,000.

So we really want to make sure that as we are approaching the loans, the idea is that we’re going through our process. So what we typically do and what we do for this client is that we’re going to inventory the loans and we typically do this through the NSLDS ugly text file that we have you retrieve.

With potentially, with private loans, look at the credit report. Sometimes, we look at promissory notes as well, and then from the inventory, now that we know where we’re at, we’re going to look at all of the different possibilities related to said loans, right? So we want to put the emotion that Meghan has with her loans with the math that supports it. 

I’ve joked about this, Kelly and Angel, in the past, that I remember talking to a client that basically is working 20 hours at a for-profit job and 20 hours at a nonprofit job and didn’t qualify for PSLF because you essentially need to be 30 hours and they were like – and they had substantial debt. I don’t think it was up to this and now but they were asking like, “What was my advice for the student loans?” and I was like, “If I can push a broom in a nonprofit for 10 hours a week, I would do that” because it just unlocks a lot of the benefit that PSLF affords.

So the third part of this really is once we figure out what that strategy is, we want to optimize that, and that’s where you know, looking at the tax situation, looking at the investment strategy and the pre-tax situation, making sure you’re filing the taxes correctly, so I would obviously want them to talk to Shawn Richards, who is our director of tax and make sure that the tax situation is jiving, not just with the financial plan but specifically the student loans. 

So that’s my take. Angel, would you add anything kind of in the student loan picture as you’re looking at this? Obviously, it’s a huge decision in terms of what they’re going to do and will hugely affect the balance sheet as they kind of start, you know, their careers and their lives together.

[0:11:44.9] AM: Absolutely, just like you said, just like Kelly said, that figuring out a strategy is key to the plan. What I would do also is really engage in budget. You know, we have to understand that our clients needs cash flow because if the goal is to pay off you know, the loans, more sooner rather than later but the cash flow just isn’t there, then we have to say, “Okay, what adjustments do we need to make as planners to our recommendation?” PSLFP in the strategy but the repayment plan may be a little bit different than what they may expect.

[0:12:19.5] NH: Yeah, and to that point, the B word, the budget word never goes away. I mean, even if you are looking at you know, a retirement picture, we kind of know, have to know like what we need to build out as a retirement paycheck. That all stems from the budget, right? So I think that is going to be consistent. 

I think to the sheet, I don’t know if we outlined it, I think there was a budget for like two to three thousand or three to four thousand for Meghan to apply towards the loans, and the strategy might be a compromise in strategy where we are aggressive with the private loans, try to get them into an aggressive payoff strategy because obviously, we know that those loans are not going to be eligible for PSLF. 

But then we are doing what we can to maximize forgiveness on the federal loans and that’s kind of where the two-prong approach to the loans really stems from. Kelly, if we stay with the student loans, obviously, we’re still waiting for and waiting and waiting and waiting for the Supreme Court to kind of rule on Biden’s effort to forgive some loans and we think that based on that decision, the president or the government will try to put a plan out there that might be more favorable to borrowers.

Can you kind of elaborate a bit on what you’ve heard or what you’ve read about that and kind of how that could potentially affect PSLF and the power of PSLF in the future as we come out of the pause here?

[0:13:43.1] KRH: Sure. So, great, Tim, you were referring to that you know, one time, 10 to USD 20,000 discharge decisions. So you know for some clients, that’s a substantial part of their loans but for many pharmacists who have accumulated student loan debt, it’s not quite as big of a percentage. 

So the kind of flip side to that that you referenced is, we’re still waiting to hear about new income-based repayment plan like new repay that would have a different formula to calculate the monthly payment. The goal with the PSLF program want us to complete it and be in it for the 10 years, 120 estimated payments but also to pay the least amount over time, which is why you see that 143,000. 

I can understand Meghan’s concern about a 10-year period to have the loans in existence but referencing Angel as well with the budget, you know if you have USD 3,000 and you’re putting 20 – like 1,400 to 2,300 towards the private loans. One, there’s only going to be so much left out of that budget but two, why would you pay extra if you qualify and are doing the work in the nonprofit?

But you need to get the loans in the correct position. So if that new repayment plan comes out and is very advantageous, the formula, making that payment lower, will create a lower amount total paid over time, which is a win. It does feel like we’re continuing across a couple of presidential administrations to make PSLF as easy as possible. So sometimes, clients still have concerns, “Will the program still be in place, will I qualify?” 

All the answers point towards yes based on what we know, you know across a couple of different administrations, there have been you know, programs put in place to make it easier but you do have to put the loans in the right position. So we’ve seen these wavers as well and there’s still one more waver until the end of the year to pick up as many payments as possible. Pretty much the key being that you did work for the nonprofit during the timeframe. 

But if you had odd forbearances, if you were in the wrong repayment plan, if you were in the wrong loan type but that’s some of the work that we do as part of the planning processes. Making sure that every loan is in the correct position to qualify and to not have that outcome when you get a surprise. There’s no surprises, you’re keeping track of your cumulative account. You know, there’s – that’s what the issue was in the past.

[0:16:44.2] NH: Yeah, and shout out to Tim Ulbrick who recently held a kind of impromptu webinar about student loans and you know, what’s beyond the pause, I think we had about 600 people register for that webinar and there were a lot of questions about PSLF and there’s still a lot of misnomers out there about the program and is it viable, is it not viable.

To your point Kelly, there has been things that in the past, would lead borrowers to question the longevity. I would say that everything that I could have read about that has always been for future borrowers. I mean, if you’re in the program, I think they would grandfather it in. This is my belief and I think if you’re reporting a strategy of forgiveness, you know there’s a good case, especially if they put out this new payment plan that your balance is going to grow. 

So to kind of take that away, you know, retroactively I think would be catastrophic, and even with tax law, they typically will write things and that’s why we have so many versions and layers of tax law. I will point out as we’re showing the slide if it is a pay as you earn, the numbers that we’re showing on the screen is, “Hey, in ten years, you’re going to pay off 143,000.”

There is two assumptions here that are, I think are wrong, one is if let’s say Meghan’s been at work for the last two years or maybe it’s the last year, she’s already a year in. So we’re projecting 10 years as if this were starting right now, so she potentially already has 12 to 24 months that are counted or potentially counted if we do the right things and then I think the other thing is that we’re showing a first monthly payment of a USD 1,080, which could also be a lot less given a new repayment plan. 

So this again, so many advisors out there still to this day as I talk to a lot of prospects will say, “Hey, I’m working with an adviser and they say don’t worry about the loans, it will figure themselves out” which is the worst advice that you can give to many pharmacists that are dealing with six figures worth of debt or they’ll do a, “Hey, pay the highest interest rate off or pay the lowest balance.” 

That quite frankly is subpar advice, so because the spectrum of outcomes is so why with regard to what you actually are paying out of your pocket for the loans, you want to make sure that you get a professional advice on this because it’s that impactful. So guys, let’s set the loans aside for a hot second and talk about the other parts of their plan. 

Angel, obviously with wedding, honeymoon, first home, kiddo in the next two years, car in the next five years, how does a planner work with a client to kind of wade through all of these things that obviously are huge life events but obviously, from a planning perspective, hugely important to kind of road map? Walk me through how you would approach Meghan and Mathew in that instance. 

[0:19:40.0] AM: Sure. I mean, I think firstly as we address the student loans, the second thing looking at their budget, what’s left over after we define a good repayment plan for them, and as a planner, we want to make sure that we are being very upfront, real, and having real conversations as to expectations, right? The last thing we’d want is to take out more debt when we don’t need to. 

[0:20:04.7] NH: That’s right. 

[0:20:06.2] AM: Just going through what their expenditures are, what’s left over, and coming up with a comfortable budget for all these things, you really can’t plan them for an additional family member but at least, you know jeffing up what does that look like on a nationwide kind of average scale. Typically, when I am working with younger individuals I like to throw in an extra two, three grand a month for raising a child. 

You know, that is very subjective but that is very much kind of my flat conservative rule of thumb. 

[0:20:37.5] NH: Yeah. I mean, I am a big believer in if I’m breaking this down with a client, and Kelly I’d love to hear your thoughts on this too, I’m a big believer in saying, “Okay, you know wedding, honeymoon, how much is that? Is that paid for? What other sources of income or what is the sources of savings for that?” “First home, okay, is it within the next year, the next two years? So what are we looking at for a down payment?” 

Obviously, I want to put them in front of someone like Nate Hedrick, to help with an agent and finding an agent or even Tony Umholtz to look at First Horizon and potentially a PharmD loan and make sure that that is positioned and then you know, yeah, first child in the next two years, what does that look like from a daycare expense or just hospital bills, who’s and where are we funding that and then car. 

You know, if that is a five-year, so kind of backwards plan into this and you know we talk about purpose-based investing. You know, kind of by proxy, I’m a big fan of purpose-based savings, so I would love to see a bucket for a house, I would love to see a bucket for a car, I would love to see a bucket for kiddos. Like I was joking around with someone, we have an ally account that is the kid’s account and the sub-accounts are Olivia, my daughter, Liam, my son, and Benji, our dog. 

So, Benji, you know for his grooming and vet bills and things like that, Olivia for swim and other things like that. So it allows Shay and I to kind of break these expenses down when we throw all of these things against the wall, Kelly, it’s overwhelming, right? It’s just a lot of things one right after the other. So walk me through kind of like how you would approach that, how you would select buckets, how you would determine like, “Okay, overlaying the student loans” and maybe that’s where the student loans were like, “Well, maybe we need a little bit of extra discretionary income and go out.” 

Not five years in the private loan but maybe 10 years to free up some income for us to do some things, so walk me through that in terms of the savings perspective. 

[0:22:35.0] KRH: Right, because once we have like one set of numbers with the student loan, you want to build out, as you said Tim, those buckets but you need to run some estimates. So typically, you know I probably would start with the house but clients do need to be candid about their goals and one of our objectives is to help clients do what they want to do within those realistic like giving pros and cons and, “Well, that might take a little bit longer if you want to do it at that amount.” 

So certainly it would be up to them, what the priorities are in terms of wedding, house, preparing for a child, and that new car but giving some context to those decisions. So like if the new house is in a year, you’d be looking at some estimates if you bought a USD 250,000 home versus a 450,000. Right now in the current environment, it’s super fun to do the two interest rates like this crazy but you know, are people still able to buy homes? 

Yes, but you need to know what that’s going to look like in terms of a mortgage payment but then, I also like to run the numbers at like a 4% so in case the environment changes in the next year, it makes a big difference in the monthly payment. Are you doing a 3% down, a PharmD loan, or are you doing 20% down, something in between? So kind of run a couple of those numbers you can see a range. 

You know, if this is what you want to do on the lower end or on the upper end, this is the amount per month in a year timeframe to do it and to get to the down payment. Definitely, childcare, one of the biggest parts of a child expense. So making sure that we have a good holding place in the budget for that. Looping back to the house, you know, it seems obvious but doing that amount for a year and knowing you can do it for a mortgage amount makes a lot of sense. 

Like if your rent’s a thousand, you want to buy a house and the mortgage is 2,500, typically that USD 1,500 difference, can you consistently put that away for a year, one for the down payment but two, that’s becoming your new average monthly expense. So like if you can do it for a year that feels pretty good that you’re going to be able to sustain it and continue it. So yeah, putting some context, some hard numbers knowing they’re not going to be to the penny. 

But this gets you or I say, we can calculate to the penny but there is going to be lots of things that happen in between, you know, anything. A job change, a new dog, all the things you know that help influence that monthly budget, you know, we need to have a placeholder for. 

[0:25:33.5] NH: That’s right and I think one of the things that we haven’t really discussed that I think is important to discuss, you know typically when we talk about a budget, we’re always looking at where can we potentially cut expenses and things like that. The thing I would really dig in with Mathew, in particular, is, “Hey, you have supplemental income of USD 10,000, is there a way for us to grow the topline income that’s coming in?” 

So can we push that 10,000 to USD 25,000 next year? Meghan, you know, if we do have pretty hairy audacious goals, are there ways for you to also make additional dollars by picking up extra shifts or whatever? So I think sometimes we always look at the expense side of the ledger and I want to grow the pie and make sure that’s looking healthy and we have other levers that we can potentially pull. 

Angel, let’s shift to the wealth-building stuff real quick. They’re kind of just starting out, they had this one old 401(k), they’re in some target date funds in their current 401(k), we don’t have many IRAs established, which I don’t know if I would necessarily do that now. Mathew has a taxable account of USD 5,000, which again, I would try to apply like when we’re asking questions about, “Hey, how are we going to fund the home payment, home down payment, or the car?” That’s where I want to start drawing those lines but how would you approach the wealth-building portion of their financial plan with kind of the facts that we have? 

[0:26:50.5] AM: With some of the facts that we have, wealth building, and what I’d like to look at first is, “Do you have an established emergency fund?” because we all know that things do happen and stuff. I want to make sure that our clients are prepared for that. More on the, “Are you on track with savings?” things of that nature. I would definitely start off by looking at the 401(k)s, making sure that they’re at least maxing out the amount that they would receive an employer match. 

From looking here, I believe that Mathew’s more deferring 5% but the match is 6%, maybe trying to get him up to that 6% is the next step for him. On the HSA fronts, it looks like they don’t put any money into an HSA. I think that is a very good tool for young healthy couples, right? That you traditionally just have your physicals, your checkups, and maybe a couple of doctor visits because of a cold or flu, what have you, and making sure that those are maxed out. 

You end up saving on the payroll tax front, you end up saving on the federal income tax front, and to the point of going back to the student loans, Meghan can also reduce her adjusted gross income and that will even save her on the back end to know but yeah, to your point on the taxable account, seeing what’s that account for, right? You have a lot of goals that you want to achieve and maybe putting some purpose behind it. 

We have it here listed as a play account but to me on a scale, if we have a pyramid of what’s important, play accounts would be at the tip. That’s the cherry on top for me, right? I would definitely want to address the menial things like again, your emergency fund. Are you putting into your 401(k)s and are your current savings do they have a purpose? 

[0:28:33.5] NH: Yeah, that’s right and I think to circle back, I think Meghan is contributing the max HSA even though it is not showing, it is just showing in text there and she has about USD 2,000. I’m assuming it’s in cash and not invested. I think the discussion I would have about that is, “Are we planning on using this for the birth of a child or do we see this as like a long kind of that stealth IRA?” and maybe it’s, “We’re going to use it for the birth of a child then afterwards, build a backup and then it will be a self-IRA” or something to that effect. 

You know sometimes, it is good to be able to cash flow health expenses when you get to that point. So for the current 401(k)s, I think you know looking to make sure that those target date funds, Kelly, look good. You know, often times we like to get out of the target date funds because they are a little bit more expense and basically pick the allocation ourselves, and then probably the last thing that we haven’t really talked to is just what do we do with the 401(k), the old 401(k)? 

Do we roll that over to a rollover IRA for YFP to manage on behalf of Meghan or do we move that over to a current 401(k) to be able to assess that? Let’s chat Kelly, really quickly about the wealth protection stuff. My initial gut on this is probably, they’re probably okay at this point in time and I would want them to focus on the debt and wealth building but probably phase two, phase three might be looking more closely at the wealth protection stuff. 

What’s your thought on that? Do you kind of differ in your opinion or would you say, “Hey, let’s kind of get through some of these other things that are on fire and then kind of pivot to life disability, estate plan” et cetera? 

[0:30:10.0] KRH: Right. I mean, certainly the wealth protection piece, you know as much as some of the other things feel overwhelming and the volume is to tackle this actually is probably the area where our clients struggle the most just to see like how much to prioritize and what they really want to have and to figure that out. So right, I would agree, you know layers of life typically influence how much protection is needed and how comfortable you feel with what you have. 

I do like that Meghan has enough coverage to cover her private student loans. That’s an area that’s a bit grey depending on the loan’s officer. So she’s got that covered, so really we try to look at liability need like if there’s something that needs paid off, that would be a big one. From there, we do, do that as part of our planning to do a very thorough assessment, see what they have, but I would agree. 

You know, the estate planning we can do some conversation and work on that during the protection meeting like checking your beneficiaries, making sure the titling is correct on accounts. That’s one layer ahead of getting a will and formal documents in place. So yeah, I would say that something that we work on, you know, as we move through the financial plan, it is important but the amounts of coverage do look fairly reasonable. 

I probably would address at some point the own occupation for two years on those disability policies. Our gold standard is typically to recommend own policies for clients in that area but again, they do have coverage. That would be just a note that I would just check into further. 

[0:32:08.8] NH: Yeah, I think in this regard, what I’m doing as I am going through the wealth protection part of the financial planning is I’m looking at what the baseline coverage is and I’m planting seeds. I’m saying, “Hey, it probably makes sense in the future to look at your own life insurance policy. It probably makes sense in the future to look at your own disability policy. It probably makes sense in the future to have an estate plan that’s drawn up by an attorney.” 

You know, I think these are typically most important and I say this a lot when you have a spouse, a house, and mouths to feed and we know that Meghan and Mathew are kind of treading in that direction. I think anybody needs an estate plan if they’re a human and they want to kind of, you know, their care and be able to pay their bills if they’re unable to but I think the ante is upped when you have other people that are kind of relying on you for their livelihood and we want to make sure that we take care of the family. 

So in my mind, I’m kind of planting those seeds that say, “Hey, this is important now, it’s going to be more important in the future. So let’s take steps when we kind of get the dust cleared and settled on the student loans and the investments and things like that, a budget can make moves here in the future.” So great stuff guys, I really appreciate the conversation. I feel like we could go on and on about this particular client. 

So thank you for kind of going through this with me in the seventh edition of the case study series. If you are out there listening to this and you’re thinking, “Hey, this sound vaguely familiar to my situation” don’t be shy, reach out to us, book a discovery meeting, and you know, let us know if we would potentially be a good fit to work together. So Angel and Kelly, thank you once again and looking forward to doing this next time. 

[0:33:47.9] AM: Thank you for having us. 

[END OF INTERVIEW]

[DISCLAIMER]

[0:33:51.8] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information on the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. 

Furthermore, the information contained in our archived newsletters, blog post, and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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The team at YFP Planning discusses a case study that includes balancing retirement savings with a major purchase and education planning.

Episode Summary

If we don’t earmark our cash for specific items, we’re very likely to spend it. In this YFP Planning Case Study, Tim Baker, CFP®, RLP®, Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®, and Angel Melgoza, MS CFP® use a hypothetical couple (Joe and Jane Script) to discuss balancing retirement savings with a major purchase and education planning. After being provided with an overview of the couple’s finances and their goals for the future, Kelly and Angel pick apart their investment approach and offer advice for how they could make it more sound. From the importance of saving with the intention of avoiding getting hit with a surprise tax bill, this episode will make you think more deeply about the way you approach your financial plan!

Key Points From the Episode

• Setting the scene for the Joe and Jane case study.
• Joe and Jane’s net worth and their assets and liabilities.
• Goals that Jane and Joe have for the future.
• Kelly and Angel share their thoughts on the first steps Joe and Jane should take to optimize their financial situation.
• How Angel recommends Jane and Joe deal with the funding of their children’s college education.
• The importance of being open to making adjustments to your financial plan.
• Working out which elements of your financial plan to prioritize. 
• Why many people end up saving less money than they could.
• How to avoid getting hit with a surprise tax bill. 
• Angel’s approach to insurance. 
• Documents that you should have in place to protect your family in case of your death or disability.

Episode Highlights

“When I talk to clients and I look at their balance sheet, the first thing I want to make sure is that you have a sound emergency fund.” — Angel Melgoza [0:08:15]

“We can’t do everything. We have to prioritize and decide what makes the most sense to overall have the best plan for the future.” — Kelly Reddy-Heffner [0:13:16]

“We tend to save, but we also tend to spend anything that is not earmarked.” — Kelly Reddy-Heffner [0:19:05]

Links Mentioned in Today’s Episode

• RightCapital
• YFP Planning: Fee-Only Financial Planning for Pharmacists
• YFP Disclaimer
• Tim Baker on LinkedIn
• Angel Melgoza on LinkedIn
• Kelly Reddy-Heffner on LinkedIn
• Subscribe to the YFP Newsletter

Episode Transcript

[INTRODUCTION]

[0:00:00] TB: What is up, everyone? Welcome to our sixth edition of YFP Planning case study. Really excited to get into this one today. We’re going to talk about Joe and Jane Script. It’s a really creative name that we have here. We’re going to do something a little bit different for this particular case study. We’re going to basically set the client up in our planning tool, which is RightCapital. We’re going to stay, not necessarily so much in a spreadsheet, but in the planning tool and outline the details of Joe and Jane Script and their family and what they’re looking for. I am once again joined by our lead planners, Kelly Reddy-Heffner and Angel Melgoza.

[INTERVIEW]

[0:00:36] TB: Really excited for you guys to be here to chat about the scripts. What’s going on? Kelly, first to you, what’s going on in life? 

[0:00:43] KRH: Not too much. End of tax season, doing quarterly meetings and hoping that it stops raining in Pittsburgh at some point. 

[0:00:53] TB: Yeah. Crazy weather. When you guys were out here after tax season it was like spring-esque. Now it’s really cold again. It’s super weird. I put a vote for warmer weather here too. Angel, you’re probably accustomed to some warmer weather. How’s it going where you are? 

[0:01:12] AM: Very warm. Hot and humid actually. We’re preheating to our summer already. Yeah. 

[0:01:18] TB: Awesome. Let’s get into it guys. I’m going to share my screen, so apologies for those listening on the podcast, because this will be very visual. We’re going to talk through some concepts, but if you’re interested, check out the YouTube channel, we will have our beautiful smiling faces on the YouTube with a screen share of what we’re working through with the client. I’m going to work through this. What we’re looking at here is a snapshot and what this tells us at a very high level just what is going on with the client. I’m going to dig into some of the juicy details about Joe and Jane; the job, the balance sheet, some of the goals. 

The first thing I’m going to look at for Joe and Jane is just like where are they at? What are they doing? What’s the family look like? Joe recently accepted a new MSL job based out of Louisville, Kentucky. They’re both Louisville, Kentucky, University of Kentucky grads. That’s where they went to pharmacy school. Joe is an MSL. Jane is an oncology staff utilization pharmacist. They have twins Addison and Sean, age 11. Their home is in Louisville. They filed their taxes jointly, but they’re actually from the Boston area. They have a lot of family in the Boston area. 

The balance sheet really looks like this. I’m going to click into the balance sheet. Their balance sheet at present, their net worth is about, we’ll call it $894,000. They have about $1.3 million in assets with about $386,000 in liability. The assets break out a good amount in cash accounts, so they’re joint checking, they have $35,000, they have 80,000 in joint savings, so that’s 115,000, that’s liquid. Then they have a non-qualified or a joint taxable account that has about 15,000 in it. 

Then most of their investments are in qualified assets. Joe has an old 401k that he’s rolling over to YFP planning for us to manage that has about $196,000 in it. He’s currently contributing to his new 401k with his new MSL job that has 5500. Jane, her 401k is currently at 236,000. Joe has a Roth, it has about 85,000. He also has an HSA that has about 15. Then the kids, they both have 529s that are identical, about 19,000 that they’re currently contributing to. They own their home in Louisville. The property’s worth about 575,000 with a mortgage that has about 281,000 left. 

The other liabilities they have is a joint credit card that has about 15,000 that they normally pay off. They have a HELOC for home improvement that’s hanging out there that has about 19. Jane has a car note at 28. Then Joe still has some lingering student debt that’s about 12,500. One of the surprises that they had when they went to file, we were talking about tax season earlier guys, is they found out that about $30,000 tax bill and those are some surprises that are not fun to get, but they basically have to figure out how to pay off this $30,000 tax bill to the IRS. 

Overall net worth about 893. Now, to pivot to some of the goals that they have, they very much want to make sure they get back to Boston to see family. They want to make sure that they’re supporting the twins’ activities in sports. Between the two of them have more frequent date nights. From a career lifestyle, they want to make sure that in the future, they have the ability to work less if they can. They’d love to be able to purchase a vacation home, maybe pivot into a retirement home in Florida. They’d love to take a domestic, annual big trip with the family. 

One of the big goals that they have is to take the whole family to Australia before the kids go off to college in the next seven-ish years. Then they have some legacy goals where they want to be able to pay 100% of the twins’ college, at least for the four years of undergrad. They want to be able to give back to the University of Kentucky and also some other charities. That’s the picture of where they’re at. I know we have some topics of discussion listed here, but Kelly, what would you say jumps out at them. We didn’t get really too much into some of the insurance stuff, which we can dip into. Obviously, they have some debt that they have to work through, but what are some of the big things that you would tackle first with Joe and Jane? 

[0:05:30] KRH: At first glance, definitely a bit of a large cash position, so trying to figure out what is their spending to see like what the emergency fund should or could be and then seeing if they have some resources left to take care of some of the debt. The little student loan out there would probably be top of mind, making sure the credit card really is paid off each month. Those would be really important things to tackle early on, I would say. 

[0:06:05] TB: Yeah. I think one of the cool things that the tool has shown us is just a liquidity analysis. How much should you keep in that emergency fund? The target that we have here, if you assume current monthly expenses, which I think we should confirm, right? That’s one of the things that sometimes you can put in a box like what we spend, but when we actually connect actual spend accounts, it’s more than that. But their target for their emergency fund is about 40,000 and their actual liquidity between their checking and their savings is about 115. 

There’s probably a scenario that we could peel off some of those extra dollars and potentially pay off the credit card to your point, Kelly, to make sure that that is completely paid off, which the balance is 15,000 at this point. You also have a 19,000-hour home equity, which was one of your highest interest rates. If we look at the interest rates, and again, we didn’t necessarily go through this from the jump, but the mortgage is not bad, 281,000, three and a quarter percent. Home equity, line of credit, 6% which is a little bit higher. 

Jane’s car, which is about 28,000, 4%. Joe’s student loan, three and a half percent, so not terrible. The IRS would have to figure out what the payment plan is for that. I just put in a placeholder of three percent. Then the joint credit card, obviously 24%. Making sure we tackle this first. I agree. I think something along the lines of like right sizing in the cash position to either clear out debt or the conversation that we could have is does it make sense to put dollars towards things like an education goal or retirement? 

Again, I wouldn’t necessarily be sleeping very soundly at night if I knew that I owed the IRS money or if I had a credit card balance hanging over my head. I think a good analysis to go through with the two of them, just to see how do we deploy these extra resources, so to speak? Angel, how about you? When you look at their scenario at a high level, what jumps off the page for you? 

[0:08:12] AM: I have to echo Kelly’s thoughts here. Really, when I talk to clients and I look at their balance sheet, the first thing I want to make sure, because of course you have two little ones, is that you have a sound emergency fund. If you have an excess cash position, I think the second thing I’d like to look at is, of course, any debt that’s over. My rule of thumb is usually 6%. I think credit cards fall within that. Paying down that is just as good as investing. It goes back to the old saying of paying, saved as a penny earned. 

[0:08:43] TB:  Yup. Yeah. I think that’s one of the things is like, if you can guarantee a 6% investment, that’s not terrible. That’s where the S&P is, once you account for inflation over long periods of time. Definitely, looking at the debt would probably be first on the list. How about Angel, when you look at one of the big things that they have that I think is probably not one that we get a lot of in terms of, “Hey, this is my education plan for my kids,” it’s more of, “I’m not really sure how I want to approach the education.”

A lot of pharmacists, again, they feel the pain and the sting of student loans. They would rather not replicate that for the kids, but when you look at, “Hey, we want to send both of them 100% for four years in the next seven years or so,” how would you break that down for them in terms of the feasibility of it? 

[0:09:36] AM: I mean, twins are 11 years old right now. They’re not too far behind on the saving aspect of it, but of course, we want to make sure that we try to meet our clients’ goals as much as possible within the confines of keeping things realistic. When I say realistic, of course there’s so many ways to fund college from student loans to savings and cash flow. But there’s really only one way to fund your own retirement. When I get clients that are adamant and that’s just the number one most important thing to them, I just like to just go back and say, “Okay, well, what happens if you have to work a little longer to do this. Four or five, six more years? Are you okay with that?” 

One of the things that I love about RightCapital that it shows us, is there going to be a shortfall? If there’s a shortfall, how do we right that ship? But from a rule of thumb perspective, I mean, kids are still 11 years old. We don’t know if they’re going to get scholarships. We don’t know if they’re even going to be one to go to college. I would say a good starting point is maybe funding a third of the college tuition. 

[0:10:40] TB:  Yeah. If we look at the analysis on the tool and we messed around with the twins. We basically said, “Hey, both Joe and Jane are University of Kentucky grads so maybe one of their kids will go to Kentucky.” We picked Sean as the recipient of that. When we looked at that and we looked at Sean’s college goal and we basically looked up University of Kentucky, one of the interesting things is we can actually click in and we can choose either in-state or out-of-state. If we assume that we’re going to be in-state, the total cost for in-state tuition is about 35,600 per year. 

If we compare that to Addison’s college goal, it’s actually more. Addison’s college goal, if we use a goal to fund a public four-year in-state, it’s actually a little bit less at 28,000. But the interesting thing is right now what they’re saving, they’re saving about 200 bucks per month. $2,400 per year into the twins’ 529. $400 total, but separate 529s. If you look at the analysis, Sean, if we assume he’s going to the University of Kentucky, they’re not at 100%. They actually have a funding shortfall of about $157,000. That’s about 23% to the goal. 

Now Addison should be a little bit ahead, because if we use the four-year average versus University of Kentucky, she’s at 30%. The funding shortfall is about 112,000. This is probably an exercise, Kelly, in saying, “Hey, this is the reality of where we’re at today.” We know the goal is 100%. We’re pretty well below that. We’re not far from that one third rule that we always talk about. How would you approach it? I mean, Angel talked about affecting retirement, but maybe there are some levers that we can pull today to get closer to that, but how would you approach that with this particular client in terms of looking at the numbers? 

[0:12:47] KRH: Well, I think once you talk through some of those goals, I do think that Angel is right, like that conversation of how it directly impacts other goals. Most people do wish to retire at some reasonable point in time. I think that the next step is to show how retirement’s looking and how on track the household is for that. Often, we can’t do everything. We have to prioritize and decide what makes the most sense to overall have the best plan for the future. This already looks, like you said, Tim, in the range. We’re at 30% for Addison, a little bit lower for Sean with decisions. I would look at retirement and I’d also start laying the groundwork for having conversations with their children as well about what is going to be available and how to make good choices. Yeah, I guess I would look at the retirement numbers next to see, do those look like they’re in great shape? How are investments flowing for that? 

[0:14:00] TB: Yeah. I think that’s a great segue. I do want to come back to the tax bill, because I know we’ve had some discussion about that off-camera and what that looks like. Let’s look at the retirement analysis. Angel, can you set the tone here in terms of what we’re looking at? Right now, what they’re showing is a 54 probability of success, which doesn’t look that great. To Kelly’s point it might be where we’re looking at things like the vacation home that we haven’t yet talked about, sending the kids 100% through college, working longer in retirement and maybe rank order in those things in terms of what’s most important. How would you approach, you know, this is more of a dire outlook in terms of how the probability of success is looking here? 

[0:14:48] AM: One of the things I like to go over with clients is the 30,000 square foot view of it all before we really dive into the details and just let them know, “If we keep on going at the pace you’re going. If we keep your goals the same, that 54% or as I like to say, five out of 10 times you’re going to have to make adjustments. When adjustments need to be made, that’s what we’re here for to help you out with, of course.” That’s what this probability really says. I mean, the software in and of itself runs thousands of simulations of probabilities. Of course, because the clients are a little younger, there’s more than that. But it lays a good foundation to say there needs to be a change done and that’s what we’re here to help you with. 

[0:15:30] TB: Yeah. I think one of the things that we haven’t even talked about is just even like the way that they are invested might be a little bit more conservative compared to maybe what they need to be. I think looking in terms of other levers to pull might be where you don’t necessarily have to save any harder, but they have to maybe take a little bit more risk with their investments. That might be something to look at. 

Yeah. I think one of the things that can be lost here is that if you look at it, it’s like half the time you’re going to fail, half the time you’re going to succeed. It’s not really about that. It’s really, to your point, it’s like, we’re going to make adjustments on the fly meaning like, if we don’t do these things, the idea is that at the end of the rainbow when the plan is over is typically at Joe and Jane’s death, there’s still money there. If there’s not, then that’s what they would say is a failure, so to speak. 

Let’s talk about the Florida home. One of the big things that we were looking at when we were talking about their goals and some of the cash flow, we’re looking at a blueprint of, “Hey, we’re going to take it in annual vacation every year.” I use this nerdy lifestyle cargo, some new vehicle every seven years. Q7Y, so nerdy script shorthand. We have an Australia trip baked in here. What I basically did was just added it to the 10,000 that we’re saving, plus the 15. We’re saying like 25,000 for a family of four to go to Australia. No idea what that costs, so that would be something that we’d have to adjust as we approach that. 

Then the big outflows that really occur at Sean and Addison’s college in 2030 when Joe is 50 and Jane is 46, and really for the next four years. Then what he’s saying, or what they’re saying is that, “Once the kids are out of college, we’d like to be able to move on a vacation home.” I think what we’re seeing is that if we assume a vacation home is half a million and we put 20% down, we just see the plan be a bit exasperated. It’s like, “Hey, we don’t have enough cash money to put towards this.” It’s starting to pull from things like retirement accounts, which we would say probably don’t want to do that, correct? 

[0:17:43] AM: That’s right. 

[0:17:45] KRH: Yes. 

[0:17:46] TB: Then what’s the process here? As again, it goes back to what’s most important? How would you – Kelly, how would you break this down in terms of just prioritizing the goals for the client? 

[0:17:56] KRH: I definitely think part of it is conversation and talking through what is most important, like when you start to see data align that everything may not be possible. This is quite a bit of stress on a budget to have the four years of college for two children at the same time. Then the vacation home to be on the backside of that. The college timing is unlikely to change, but like the vacation home, if it’s done at a different time interval, does that make a difference? But looking at the numbers, the stressor is pretty significant. It pulls quite a bit from the retirement accounts. 

Then it’s looking at savings capacity. If you’re having the conversation that these items are all very important, you’d like to do as many as possible, then it’s looking to see, is there room each year now where you could be saving more if this is really what’s most important? We tend to save, but we also tend to spend anything that is not earmarked. We talk a lot about smart goals like, if college is a goal, if the Florida home is a goal. Really looking at how much you need to be putting into each account and do you have that like, some of the cash flows when we had looked off screen, look like there’s years where there could be some additional resources. Like, can we start there and say, “If you really get a little bit more intentional with saving, like those unsaved cash flows and the second to last, can you take some from there and help better meet the goals?” But we do tend to spend what we make. We tend to spend the extra almost before we’re going into goals a lot of times. 

[0:19:59] TB: Yeah. I think to your point, Kelly, if you look at their cash position, again, they have some debt, but there’s probably per their plan, they’re running a surplus of unsaved cash flows that if you say, “Hey, double your education or double the amount of money.” Right now, they’re putting 200 bucks into a taxable account, which we’re earmarking for a vacation home, 200 bucks to Addison’s 529 per month, 200 bucks to Sean’s 529. If you double that, maybe these numbers are closer to zero, maybe there is more of a shortage, but those are the things I think that, it goes back to one of the things we talk about all the time on the podcast is just like investing or saving with intention. 

I think it’s easier to do that than to put it in a dark hole, which is like a savings account. Now it’s good to have that when you do have a tax bill and things like that, but those would be the things that I would be pressing on. It’s like, can we do more from the aspect of dollars going into those three accounts? Even Joe’s 401k. He’s putting in 10% and he gets a decent match. Jane’s maxing that out. Can we get to 11, 12? What’s the road to get them to max out so we’re not seeing so much of a surplus of cash or basically on spend cash, but we’re directing them more intentionally towards the goals, if that makes sense?

Can we pivot and talk about the surprise tax bill? Like, this does happen, right? How does this happen? What are the ways to get in front of this? Cause this is never fun to go and file your taxes and say, “Hey, congratulations.” It’s better if you have $30,000 back, although we know that having that $30,000 in hand throughout the course of the year is important. When you’re on the other side of that, not many people are just putting money aside to pay the tax man. Why does this happen? Angel, how can we get in front of this? What are your thoughts with regard to the tax bill? 

[0:21:57] AM: One way it happens is that you don’t pay enough taxes during the year. Typically, what we do here is we do tax projections with tax professionals’ mid-year to see, are you on pace to paying your fair share of taxes? If you’re not, of course, we have to adjust that through your employer. Of course, that’s how to get in front of it, just to see, are you on pace to pay your fair share from this year’s taxes? 

[0:22:24] TB: Yeah. Probably what happened, because Joe’s employment is new, he left his old employer, is that the withholding was never set up correctly. Kelly, we know the tax bills, there are things that you can do to reduce that, but at the end of the day, you can’t circumvent that, right? Part of the problem that maybe why they’ve amassed more cash recently if we make that assumption is because we weren’t withholding enough to pay the IRS as we were earning those paychecks. 

[0:22:56] KRH: It’s an excellent first red flag like, “Oh, there’s more in my paycheck than I expected.” That’s probably the first place I would go is withholding. I do think working with the tax professional can be very helpful. I think the purpose of a projection is to minimize that huge surprise like, there’s going to be things that change. Over the course of a year, an average client household might change a job, which we have here, additional family member, the kids going to college, contributing to the 529 accounts can have an impact on the state tax. 

Doing a Roth conversion, at first, I was like, oh, maybe that bill was somebody decided to move a pretax into a taxable account and didn’t have professional advice on what might happen. Lots of things happen over the course of the year. A projection is not going to get to the penny, but it could help eliminate a big unpleasant surprise that would give a couple of months to change the withholding to look at the retirement contributions and get prepared. 

[0:24:09] TB: Yeah. Shout out to Sean Richards at YFP Tax. These are some of the things that he’s going to be doing with clients, a projection to get in front of some of those surprises. The tool that we have here gives a rough number based on last year of like, “Hey, at the end of this, Joe and Jane, we think that you’re going to have to pay about $42,000 in taxes. If we’re halfway through the year and you’ve paid around 20, 21,000, we’re good.” Again, very much broad strokes, but definitely would want to work with a tax professional to make sure that those types of surprises are mitigated because even things can happen at the very end of the year. It could be that Jane got a bonus that was higher than she thought and we have to make sure that the right amount is withheld. 

The other thing that we see for some of these tax surprises is like, if you do have side hustles, you’re making 1099 income and you’re not paying tax on top of that, it might make sense to withhold more from your W2 paycheck just to soften the blow a little bit. That would be one thing that hopefully we’re not going to replicate in the future and get in front of. The last area guys I want to just focus on is the insurance piece. 

We’re not going to get into disability, because I don’t think we have a whole lot of detail on that. But when you look at the life insurance right now, they’re really just showing a life insurance policy through Joe’s employer that’s about 50,000. Jane has 162,000 through her group policy. Obviously, I think with college on the docket, a mortgage, young kids, this is probably insufficient where we probably need to look at policies. Angel, how would you purchase with the client? 

[0:25:49] AM: There are a couple of ways, but I mean, I like to use rules of thumb to begin with. I mean, typically I like to look at our clients’ income, make sure they have either 10 times or 15 times insured, but there’s a formula that we use where it’s very need-based. We look at final expenses, the nationwide average. We look at liabilities that are happening, things like mortgages, things like student loans or other liabilities included in that. Definitely, because you have children, we like to throw in maybe about $100,000 up front if something does happen, if somebody predeceases the other, to make sure that your kids go to college and get educated. Then after that, we just throw in a couple of years of income to make sure that there’s a readjustment period and that any savings that you would have made while you were alive go into an account or your spouse can not take a dip in lifestyle. 

[0:26:46] TB: Yeah. I think you can definitely use the rules of thumb. I would probably sleep more comfortably at night if they had probably a million dollars each at a minimum between the two of them on top of their group policies. I think you can very much break it down by liabilities, adjustment period, all that stuff. I think some work to be done definitely with that. How about Kelly, if we look at the other part of wealth protection, believe it or not, they’re pretty decent. I think when the twins were born, they went through a lot of the state documents. Anything that you would call out here, maybe outside of just updating documents and just making sure that they’re good, that you would want them to work on from a state plan perspective?

[0:27:26] KRH: I’m excited that they have any documents in place, so that was a huge check mark. I don’t know if it’s just our discomfort with this conversation, it slightly surpasses the life insurance in terms of discomfort, but these documents are very important, especially with two young children, but even with a two-person household like, it just makes things so much easier. I’m amazed at the number of stories, I don’t know if it should relate to us, even though it’s famous people that are in the news, just how difficult it is to get through. I feel like there was just a recent article about another famous person in the news who passed away suddenly unexpectedly and his wife has been navigating for months, even though the state laws are friendly for the spouse. 

Always making sure that they’re up to date. Certainly, the guardian is big with having younger children. In this case, they don’t have a trust. That is a conversation with an attorney to see if – oh, actually living trust would be good to add to that. Sorry, I did not see those were not checked off. Yeah, that would probably be the one thing on the list just to make sure if anything is needed there. We are not attorneys at YFP, so we would default to legal expertise, but we can help provide guidance on looking into resources, documents needed, how to have those conversations with each other and with a professional. 

[0:29:07] TB: Yeah. I think this is a phased process, right, Kelly? It’s education of, “Here. These are the things you probably need.” Then bugging clients to get them in place. Then probably the last phase is, I think next level is make sure that you have a legacy folder. It’s all in one spot. The people that know that the people, the guardian, the executor know where to find this stuff. But to your point, it’s a tough one for us to really execute, because unless you have some experience with this, because again, not many of us want to think about our premature death or disability. Definitely the will, the power of attorneys for property, for health, the living will, even a basic beneficiary check, just to make sure that all of the things are where they should be. This tool actually has, I think a pretty good list of the different accounts out there and who’s the beneficiary and who’s the contingent beneficiary. 

Going through that every couple of years, I think is a good, good practice. Probably, just some little bit of touch up to do much more work on the life insurance side from a wealth protection perspective, but pretty okay from the estate plan. We just need to brush it up and make sure it’s current and well-rounded. We’ll leave it there. Kelly, Angel, thank you so much for joining me for this sixth installment of the case study. Hopefully we changed up a little bit. Hopefully this will be meaningful for our listeners out there and really looking forward to doing the next one with you. 

[0:30:37] AM: Thanks for having us. 

[END OF INTERVIEW]

[0:30:40] As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information of the podcast and corresponding material should not be construed as a solicitation or offered to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. 

Furthermore, the information contained in our archive, newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacists, unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. 

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[END]

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