Case Studies

These case studies illustrate the power of ESPlanner. The case studies are based on typical user questions and and common household economic situations.

What's it Really Cost to Live in Seattle?

In tough times like these, you need to know precisely the price you're paying for everything you buy. But knowing the true price of one of our largest purchases -- location -- is particularly tricky.

Will your living standard be 28 percent lower or only 5 percent lower if you move to Seattle with its cosmopolitan coffee houses, but rainy weather, rather than stay in Kansas City with its delicious Bar-B-Q, but scary tornadoes?

Should I Take My Pension in a Lump Sum?

Recently overheard on another financial website . . .

Question: "I'm 60 and have just retired. I have a pension that can pay me $760/mo. or a lump sum of about $120,000. I'm torn. Should I take the monthly payment format or the lump sum? It seems that I could take the lump sum and invest it elsewhere and do better job investing it. Right or wrong?" --Bill H., Birmingham, Ala.

Let's flesh this case out and see what ESPlanner suggests.

Taking a Flyer on Fly Fishing

Every day is tough: John manages the control tower at O’Hare International in Chicago. Prior to 2005, O’Hare laid claim to being the world’s busiest airport. (Today, Atlanta’s Hartsfield airport holds that title.) The stress is enormous. But it instantly vanishes when John’s pursues his passion—fly fishing on the Fox River, which is just down the road from his home.

The 529 Solution

Mary Hinojosa and her husband Miles Sigwell have two children to put through college--Franky, born in 2001, and Juliet, born in 2006. They would like to continue the family tradition of attending Caltech in Pasadena, California, so they must brace themselves for the annual $50,000 it will cost for each child in tuition, room, and board.

Mary and Miles have good incomes and still have some time to save. But after putting pencil to paper, they realize that this is not a simple calculation. Here's what they want to know:

Given that the $50,000 annual cost (measured in today's dollars) will arise in 2019-2022 and 2024-2027, how much do they need to save and when not only to meet this bill, but to have a stable living standard before and after they get the kids through college?

Shacking Up With Mom

Selma Jones and her only child, Roger, aren’t crazy about each other, but they share a common desire – obtaining a higher living standard.

Roger’s 35 and makes $60,000 a year working for a landscaping company. Roger owns a large home that’s feeling pretty empty now that his girlfriend Thelma’s left. Roger hates to cook, clean, and do laundry. He spends lots of money eating out and having his place cleaned and his shirts pressed.

There's No Place Like Home For Saving Taxes

Bert and Ernie have been pals for a long time. They have the same $80K annual salary, and their employer, PBS, matches their $4K contribution to a 403(b).

They live across the street from each other on Sesame Lane and each owns his $200K Tudor-style home outright. They pay annual property taxes ($2K) and insurance ($700) on their home. Their homes are identical save for one feature: Bert gets the morning sun and Ernie gets the evening sun. Alas, their envy of each other is palpable.

Work Less Longer

Janet is a 55-year-old heart surgeon earning $250,000 a year, and she is burned out working every day. Her husband Jack is also 55, but he spends his days “birding” and has only a modest earnings history. Their 16-year-old son will head off to college to study ornithology in three years. Janet can’t take the work load much longer and plans to retire at age 60.

Convert Your IRA to a Roth!

In 2010 everyone, regardless of income, will be eligible to convert their regular IRA money into Roth IRAs. Doing so will require paying taxes on the amount converted; i.e., the amount taken out of the regular IRA and put into a Roth IRA.

Currently, only those with adjusted gross incomes of less than 100K (single or married) are eligible to do the conversion. And those with higher incomes (110K for singles and 160K for married joint filers) are not able to contribute to a Roth IRA, although they can contribute to a Roth 401(k) if their employer has established such an account.

If your money is in a 401(k) plan, you may, with your employer's help, be able to roll over your 401(k) to an IRA and then in 2010 do the conversion. See http://www.kelseypub.com/blog/homefamily/2009-02-17/from-a-lousy-401k-to...

This case study shows a very large potential gain in living standard from exercising this option.

The Bottom Line is Your Living Standard

All personal financial planning questions, from Can I retire early? to When should I take Social Security? to What can happen if I invest in risky assets? boil down to the impact on your living standard.

ESPlanner is the only financial planning program that directly calculates your living standard and helps you achieve the highest living standard that your current and future economic resources can support.

Take the example of Jack and Jill Sprat, a middle-aged couple.

Basic Profile:
Jack is 51, Jill is 49
Their children have already graduated from college.
Housing: 25 years remain on their $350,000 mortgage. They pay $2,000 per year in property tax, $1,500 per year in homeowners insurance, and make a $2,255 monthly mortgage payment. Their last payment is due in 2033.

Retirement Dates: Jack 65, Jill 63 (year 2023)

Which Mortgage Should I Take?

John and Betty are very lucky. They are 30 years old; they just got married; and they have reliable jobs in today’s economy--earning $50,000 each. The couple has a 3 year-old and a 1 year-old. They plan to send their children to moderately expensive colleges and to retire at 65. They have a $12,500 in savings, plus $70,000 set aside for a down payment on a house.

When Should I Take Social Security?

For years the Social Security Administration urged retirees to take Social Security as soon as possible, even though doing so meant permanently receiving lower benefits. Here’s what they’ve said: “From an actuarial perspective, it doesn’t matter when you start collecting. But you may die early and regret (hopefully, in heaven) having waited, so don’t take the chance of dying before collecting. Take your benefits early.”

This advice and logic was as bad as it got. As far as we know no one has any regrets in heaven or needs any money.

Fortunately, thanks, in part, to discussions we've had with their Chief Actuary, Social Security is no longer twisting people’s arms to take benefits early. The reason to wait is that by doing so you are effectively buying more longevity insurance – more insurance against living longer than expected. (But, as described below, waiting to collect all your possible benefits is generally not the best policy).

Contributing to the ROTH or IRA

Huck and Molly Finn from Hannibal, Missouri are both 30, earn $50K each, have a modest home, plan for one child in 2010, target to retire at 65, and expect to earn 3% real (after inflation) on their investments.

Their employers offer regular and Roth 401(k) retirement plans, but no match. Both plans can save taxes. Contributions to regular 401(k)s or IRAs are tax deductible, but withdrawals are taxable. Contributions to Roths aren’t deductible, but withdrawals are tax free.

Equitable Alimony

Economics can’t say what’s fair, but it can help with divorce settlements by showing who’s really getting what and how to make the best out of a bad situation. Take Frank and Stacy Loveless. Frank’s 45, Stacy’s 38. He’s a dentist, she’s a dietician. They live in Saint Louis with their two kids, ages 7 and 3. The couple met in Frank’s dentist chair a decade ago. Stacy asked him out and, boy, what a wedding and what a great marriage until, well, things changed. Their main goal now is settling their affairs without declaring war.

Order of Withdrawal

Roth and regular retirement accounts provide significant opportunities for saving taxes over your lifetime. But deciding how much to invest in each and which to withdrawal first is tricky without the right software.

Pay Off Your Mortgage

Jimmy and Rosalynn Carder are both 50, live in Planes, Georgia, and earn a combined $75,000. Thanks to the untimely death of Jimmy’s rich brother, Bilous, they also have $500,000 in financial assets. Jimmy and Rosalynn want to buy their dream house. It’s on the market for $437,500. But they don’t know whether to use their inheritance to buy it outright or use just 20 percent of their inheritance as a downpayment for a mortgage and save the rest. At the prevailing 7 percent rate for a fixed-rate, 30-year mortgage, they’ll pay $2,329 per month if they take out a mortgage.

Shedding Extra Homes

One way to raise your living standard is to sell extra homes, assuming you are rich enough to own more than one home. Take Earnest Hammokway and his wife, Ilsa. Both are currently age 60 and make $100K each. Collectively, they have $150k in regular assets and $800K in retirement accounts. Their primary home is valued at 750K and their vacation home on the Two Hearted River in Newberry, Michigan is valued at 300K. They have 10 years left on the primary home’s mortgage and 15 years left on the vacation home’s.

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