Reference no: EM132918374
Case One: The Retirement Dream House
Otto and Sara Bittner finished constructing their retirement home when Otto retired at age 65. Their financial planner projects that their living expenses in the new home will be fully covered by their available financial assets. The couple made a supplementary withdrawal from their portfolio in order to help their daughter and son-in-law purchase property. As time passed, the Bittners made more supplementary withdrawals from their portfolio in order to subsidize their daughter and son-in-law's living expenses, as they had insufficient disposable income to support their new household. Updated projections prepared by their financial planner suggest that they would exhaust their portfolio in less than 10 years. Faced with this, 204 FINANCIAL PLANNING CONCEPTS the Bittners ceased subsidizing their daughter's monthly household expenses. This resulted in their daughter and son-in-law running up large credit card balances that they could not pay, which the Bittners repeatedly paid off to prevent the debt from going to collections. Their financial planner would have likely uncovered their desire to help their children if he had engaged them in deep discovery as part of the policy development process. What kind of financial planning policies might have prevented this situation? Here is one set of possibilities relating to the Bittners.
¦ We will spend each year from our portfolio a sum not to exceed the spending targets specified by our safe withdrawal rate (SWR) policies.
¦ We will not facilitate the purchase of assets by our children that they cannot afford to maintain with their own earnings.
¦ We will provide financial education and counseling to our children and other family members, but we will not provide direct financial support.
The Bittners' SWR policies, if adopted along the lines proposed by Guyton and Klinger (2006), would have provided continuous and evolving feedback. Without requiring updated projections, the SWR policies would have likely triggered the capital preservation rule, perhaps on every anniversary. The Bittners would not only see that they were exceeding their target spending but they would also have the additional feedback that their target spending was getting smaller each year. The second policy would have hopefully caused them to inquire more closely as to their daughter and son-in-law's ability to maintain the mortgage and property taxes on the home for which the Bittners were about to make the down payment. Finally, when their children became financially burdened, the third policy would have resulted in paying for their daughter and son-in-law to see a credit counselor or bankruptcy attorney, but they would not have repeatedly paid off the credit cards.
REQUIREMENTS
- INTRODUCTION
- Identify the key problems and issues in the case st.udy
- Formulate and include a thesis statement, summarizing the outcome of the analysis