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    Client Memo regarding a shortfall in retirement savings

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    A client has engaged you to advise her on how she is doing with her preparation for retirement. She is a well-paid professional with a current salary of $150,000. She has 15 years until her full retirement age and wants to be able to retire at that time. She expects that her salary will increase about 3.5% each year until retirement. Client has a taxable brokerage account that now generates about $3,500 in dividends each year. This dividend income can be expected to increase by 5% each year. Client is vested in a small pension from a previous employer that will pay about $15,000 per year during retirement. There is no cost of living adjustment (COLA) for this pension, so the $15,000 figure will not change during the retirement years. Regarding Social Security, Client's earnings have always been at or above the maximum amount subject to Social Security withholding. In terms of retirement savings, 20% of Client's annual salary goes into her retirement savings accounts (10% her money with an employer contribution of 10%). If she needs to increase her retirement savings, she has access to a tax-sheltered account into which up to an additional 10% of her salary can go.
    Use the following information as you develop your retirement plan for Client—
    o Rate of inflation for all years, 3.5% (use this as the COLA for adjusting Social Security benefits)
    o Expected rate of return on retirement savings
    o Until 5 years from retirement (i.e., next 10 years in the base case), 7.5%
    o Last 5 working years and all retirement years), 5%
    o Current retirement savings balance, $600,000
    o Until retirement, Client puts her dividend income into savings (a rainy day fund). After retirement, the dividend income will go towards meeting her retirement income goal, but, barring an emergency, the principal will not be touched. Accordingly, only the dividend income from this "rainy day fund" should be considered in your analysis—although, you certainly can inform the client as to the value of the stocks in this fund at various points in time (assume stock value also increases 5% a year, which drives the increase in dividends)

    - 1st Part: We determined the income needed from client's retirement saving in the first year of retirement, 2028:
    Salary in last working year: $242,804
    Plus inflation for 1 year, 3.5% x 1.035
    Less saving FICA (44,355)
    x 90%
    Target retirement income $186,252

    - 2nd Part: We determined that client would have $2,450,820 in retirement savings at the end of 15 years.

    -3rd Part: We determined that client would need $3,021,432 to fund her target income for 30 years of retirement.

    Now, we need to write a client memo, in which we explain things to the client, starting with the projection that her savings will be over $500,000 short of where she needs them.
    - This memo shouldn't be more than 2 pages.
    - Should she increase her savings on savings?
    - Should the ROR be increased?
    - but higher return usually means more risk.
    - Or, can client live on less income?
    - tell the client how much income she will be have if she keeps saving as she has been.
    - Think about it! What would you like to know?

    - We are only telling a story -
    - What did client ask you to do? - Assess her retirement plan
    - What did you do? - Don't get technical about the analysis
    - What did you find? - Again client is unlikely to understand concepts like present value, etc; that is why is important not to get technical.
    - What do you recommend?
    - Close the memo and thank the client for the opportunity to serve, etc.

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    Solution Preview

    Dear Client,

    Your retirement savings, using the current savings rate and investment return assumptions, will leave you with about $2,450,820 in retirement savings. This is short of the $3,021,432 we computed as the "nest egg" needed to fund an annual retirement income of $185,252. So, what are you options to respond to this shortfall? Here are a few ideas, starting with the most promising.

    Save more

    You currently save 10% which is matched by your employer. Saving more will great increase the "nest egg." For instance, if you can save another $13,000 a year, you will cut that shortfall approximately in half, assuming a 5% return or more if the return is higher.

    Reduce spending habits

    Many clients find that when they lay out their spending in a budget, they are surprised at how much they are spending on ...

    Solution Summary

    Your memo is 488 words (just shy of two pages) and uses everyday language to explain the retirement situation. Three solutions are offered. Suggestions are made about how to proceeds.