Personal Financial Planning Monthly - Editorial Direction LLC

Recommendations

Info

PERSONAL FINANCIAL PLANNING MONTHLY to beneficiaries in a tax-advantaged manner. Rattiner highlights such strategies as using the annual gift exclusion, designing special trusts, and using the generation-skipping transfer exclusion. Insurance Private placement life insurance offers certain benefits to high-net-worth clients that they would not be able to obtain elsewhere. Lewis J. Saret of Cohen Mohr LLP and Professor Lewis D. Solomon of George Washington University Law School outline these benefits in “Using Private Placement Life Insurance.” The authors look at how private placement life insurance arrangements typically work and the practical considerations of implementing a policy. Case Study Can an IRA rollover be performed posthumously if it is clear that that is what the deceased client intended In “Unexpected Death Complicates Process of Intended IRA Rollover,” Attorney Mark W. McGorry examines a real-life case where a client died before completing an intended consolidation of two defined contribution accounts into a single IRA. McGorry outlines the case in detail, explains how the IRS has ruled in similar cases, and explains his recommendations. 2 November 2002
RETIREMENT PLANNING Treatment of Growing Annuities in Financial Planning By G. Eddy Birrer and Kent Hickman Many personal financial planning illustrations are limited by their focus on fixed deposit, withdrawal, and interest rate data. For example, illustrations contained in information presented to employees about tax-sheltered annuity accumulations, in advertisements for Roth IRA plans, in finance textbooks, and in other publications, tend to focus on equal periodic cash flows, that is, ordinary annuities. Financial calculators on Web sites managed by mutual fund companies and other organizations, likewise, often are preprogrammed for ordinary annuity computations, as are handheld calculators. Related sensitivity analysis normally consists of simply changing the combinations of amounts, interest rates, or projected rates of inflation. Amounts invested in 401(k), 529, and other plans in many cases are not fixed, however, but instead are a percentage of annual earnings. Planned or estimated amounts to be withdrawn, likewise, should not be fixed, but rather should be adjusted to reflect inflation, cost of living, or annual education cost increases. Compound interest and discount rates also should be adjusted in response to each major change in investment portfolio allocations. Appropriately adjusted deposits and withdrawals, therefore, are more likely to be in the form of growing annuities, based on rates of growth in inflation, earnings, or some other factor. Financial planning models using growing annuities help address limitations inherent in the conventional illustrations mentioned above. Decision makers thus can better model financial planning problems or cases and may develop better computer-based spreadsheets. Growing annuities can be defined as cash flows, equally spaced in time, which grow at a constant rate over the life of the payment stream and end after a predetermined number of payment or withdrawal periods. Knowledge of the simple mathematics underlying present value (PV) and future value (FV) calculations, hereafter referred to as PV analysis, will improve financial planning and decision making, especially in cases involving growing annuities. The mathematics, summing a geometric series, is basic algebra, yet it is the key to understanding PV calculations made on financial calculators and computers. An extension of this technique is the constant growth stock formula, essentially a growing perpetuity formula. Knowledge of PV mathematics helps financial planners model decision cases. This article presents a simple example illustrating the mathematics underlying a growing annuity problem, followed by more comprehensive retirement planning examples involving growing annuity deposits and withdrawals, with changing discount rates. Results in the examples are then compared to those obtained assuming ordinary, rather than growing annuity, PV and FV calculations. In all cases, timelines are used to depict timing and amounts of cash flows, and whether amounts are to be compounded or are to be discounted in the analysis. General forms of the FV and PV equations applied to education funding and retirement planning cases later in this article appear below. (Derivation of the FV equation is presented in Appendix A. The PV equation is solved for similarly.) FV Equation (Future Value of Growing Annuity) Where: FV = future accumulation x = initial deposit, assuming each deposit is made at the end of each period (ordinary annuity) November 2002 3
Page 1 and 2: Volume 2 • Number 11 THE JOURNAL
Page 3: PERSONAL FINANCIAL PLANNING MONTHLY
Page 7 and 8: PERSONAL FINANCIAL PLANNING MONTHLY
Page 13 and 14: INVESTMENT STRATEGIES Advising the
Page 19 and 20: RISK MANAGEMENT Reducing the Wealth
Page 25 and 26: INSURANCE Using Private Placement L
Page 31 and 32: CASE STUDY Unexpected Death Complic
Page 35: WATCH FOR THE DECEMBER ISSUE OF Per

Personal Financial Planning Monthly - Editorial Direction LLC

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?