A) The Purpose for Providing This Financial Analysis For Mr. and Mrs. Doe:
The purpose of this report is to render an opinion regarding the amount of investment income that Mrs. Doe can generate from her share of invested marital assets as well as compounded growth from these assets over time. In reaching my opinions, I reviewed the parties’ recent bank account and IRA statements reflecting the balance of these assets. I reviewed a draft 9-207 Statement prepared by counsel for the parties identifying various marital assets and estimated or actual values. I reviewed historical and projected market data pertaining to various investment classes and indexes. I reviewed the parties’ Social Security Benefit Statements.
I am a member of the Maryland Bar. For nearly 30 years, I have maintained a business offering financial and estate planning, investment advisory services and divorce financial analysis. I am a registered investment advisor who is affiliated with LPL Financial. LPL Financial is the nation’s largest broker/dealer. LPL provides independent, unbiased advice and investment management. I am one of more than 16,000 financial advisors across the country affiliated with LPL Financial. In advisory and brokerage assets, the company manages over $659 Billion.
I am a certified divorce financial analyst, a member of the Associat ion of Professional Family Mediators, the Maryland State Bar Association, the Institute of Divorce Financial Analysts, as well as a master analyst in financial forensics with an emphasis in matrimony.
I serve as a family mediator and am active in collaborative law. I also provide mediation training and have provided continuing education to family law judges and magistrates relating to divorce financial analysis. I am an author and regular contributor to Proactive Advisor Magazine, which serves the financial planning community.
All of my opinions rendered in this report are made within a reasonable degree of professional probability as a financial advisor and certified divorce financial analyst.
B) Overview and Description of Various Model Portfolios:
Investment portfolios are constructed with diverse asset classes. From a risk tolerance perspective and therefore a corresponding long-term performance expectation, it is well accepted that the more stock exposure in a portfolio, the greater the risk as well as higher performance expectations. Conversely, the greater the percentage of fixed income allocations, the more conservative is the risk profile and corresponding performance expectations. “Conservative”, “Balanced” and “Growth” portfolios normally hold similar asset categories and funds, but with different proportions.
C) Components of Portfolios:
LPL Financial considers an investment profile of “Income with Moderate Growth” as “Conservative”. LPL Financial considers an investment objective of “Growth with Income” as “Balanced”, and one whose focus is mainly growth oriented as “Growth”. I concur with these definitions.
The asset categories in which each of the three portfolios as reflected by their risk and performance objectives are comprised to various degrees are as follows:
1) a) U.S. large cap is represented by the S&P 500 index . b) U.S. mid cap is represented by the Russell Midcap index. c) U.S. small cap is represented by the Russell 2000 index. d) Large foreign equities are represented the FTSE all -world ex U.S. e) Emerging market equities is represented by the FTSE emerging markets index. f) Fixed income is represented by the Bloomberg Barclays U.S. aggregate bond index g) High Yield is represented by the High Yield corporate composite index. h) TIPS (Treasury Inflation-Protected Securities) is represented by the Bloomberg Barclays Inflation protected index. i) Bank loans is represented by the Credit Suisse Leveraged Loan index. j) Alternatives is represented by master limited partnerships, hedged equities, and managed futures and the Real Estate index, the market neutral index, the Alerian MLP index, and the Credit Suisse managed futures index. k) Cash
The past performance for these indexes as of 8/31/2018 as well as LPL Financial’s forward guidance in terms of more conservative anticipated prospective future returns for these indexes are listed below Each of these indexes as well as LPL Financial’s forward guidance are routinely relied upon by financial advisers when analyzing and providing financial planning advice to clients.
a) S&P 500: Past 10 years: 10.86%. Past 5 years: 14.52%. Forward guidance: 6.6%
b) Russell Midcap: Past 10 years: 11.64%. Past 5 years: 14.19%. Forward guidance: 7.2%
c) Russell 2000: Past 10 years: 10.46%. Past 5 years: 13%. Forward guidance: 7.2%
d) FTSE all-world ex U.S.: Past 10 years: 3.86%. Past 5 years: 5.82%. Forward guidance: 7.4%
e) FTSE emerging markets: Past 10 years: 3.48%. Past 5 years: 5.2%. Forward guidance: 8.9%
f) Bloomberg Barclays U.S. aggregate bond: Past 10 years: 3.77%. Past 5 years: 2.16%. Forward guidance: 2.3%
g) High Yield Corporate: Past 10 years: 7.39%. Past 5 years: 5.14%. Forward guidance: 4.6%
h) Barclays Inflation Protected index: Past 10 years:3.03% Past 5 years 1.88%. Forward guidance: 2.9%
i) Credit Suisse Leveraged Loan: Past 10 years: 5.85%. Past 5 years: 4.35%. Forward guidance: 3.9%
j) Alternatives: Real estate index: Past 10 years: 7.77%. Past 5 years: 10.08%. Long term performance for Alerian MLP index is 11.73% and 4.49% for Credit Suisse Managed Futures. Forward guidance: 6%
k) Cash generates 2%.
D) Composition and Performance of Portfolios:
1) Conservative (Income with Moderate Growth):
a) S&P 500: would comprise 20% of the portfolio, Russell Midcap: 2%, Russell 2000: 8%, FTSE all-world ex U.S.: 2%, FTSE emerging markets: 5%, Bloomberg Barclays U.S. aggregate bond: 37%, High Yield Corporate: 4%, Barclays Inflation Protected Index: 8%, Credit Suisse Leveraged Loan: 6%, Alternatives: 6%, Cash: 2%.
Based on these percentage allocations, the average annual return for this portfolio would be 6.26%based on the past 10 year performance returns, 6.55% based on the past 5 year performance returns, and 4.49% based on LPL Financial’s forward guidance.
b) Another approach to discerning what a “Conservative” investment would yield is to consider an immediate annuity which would pay a guaranteed stream of income for life. An immediate annuity for a 60 year old female would provide 5.65% income per year, and if income is deferred until age 67, an immediate annuity beginning at age 67 would provide income at a rate of 6.5% per year.
2) Balanced (Growth with Income):
S&P 500 would comprise 34% of the portfolio, Russell Midcap: 7%, Russell 2000: 9%, FTSE all-world ex U.S.: 3%, FTSE emerging markets: 6%, Bloomberg Barclays U.S. aggregate bond:
21%, High Yield Corporate: 3%, Barclays Inflation Protected index: 6%, Credit Suisse Leveraged Loans: 3%, Alternatives: 3%, Cash: 2%.
Based on these percentage allocations, the average annual return for this portfolio would be 7.42% based on the past 10 year performance results, 8.74% based on the past 5 year performance results, and 5.28% based on LPL Financial’ s forward guidance.
3) Growth (Growth):
S&P 500 would compromise 41% of the portfolio, Russell Midcap: 9%, Russell 2000: 11%, FTSE all-world ex U.S.: 6%, FTSE emerging markets: 12%, Bloomberg Barclays aggregate bond: 7%, Barclays Inflation Protected index: 3%, High Yield Corporate: 0%, Credit Suisse Leveraged Loans: 3%, Alternatives: 6%, Cash: 2 %
Based on these percentage allocations, the average annual return for this portfolio would be 8.11% based on the past 10 year performance results, 10.57% based on the past 5 year performance results, and 6.56 % based on LPL Financial’s forward guidance.
E) Summary of the Major Marital Assets:
- Marital home: Net proceeds expected to be $550,000
- Company XYZ property: $100,000
- XYZ home: net equity of $200,000
- XYZ joint Savings and checking account #XXXX: $1,613 (as of 9/26/2018)
- XYZ Savings Account #XXXX: $430,981(as of 3/28/2018)
- XYZ Savings Account #XXXX: $242,626 (as of 3/28/2018}
- XYZ Checking Account# XXXX: $3640 (as of 3/13/2018)
- IRA FBO Mary Doe with XYZ Financial Account# XXXXXX: $51,672 (as of 3/29/2018)
- Simple IRA FBO Mary Doe with XYZ Account #XXXXXXXX: $212,085 (as of
3/31/2018) - Simple IRA FBO John Doe with XYZ Account #XXXXXXXX: $412,970
(as of 6/30/2018) - IRA FBO John Doe with XYZ Account #XXXXXX: $158,637 (as of
8/31/2018) - XYZ account #XXXX titled in Mr. Doe’s name worth $1654 (as of 8/31/2018)
- XYZ account #XXXX titled in Mr. Doe’s name worth $35,957 (as of 8/31/2018)
- John Doe, P.A. –No valuation provided at this time.
F) Assets Available for Investment:
The non-retirement financial accounts and net proceeds from the marital home equal $1,266,471. If that amount is divided evenly, Mrs. Doe’s one-half share equals $633,235.50. The IRA’s equal $835,364. If that amount is divided evenly, Mrs. Doe’s one-half share equals $417,682.00 in retirement funds.
G) Financial Impacts:
1) Non-retirement accounts:
If Mrs. Doe were to purchase a residence for herself for $350,000 after selling the marital home and roll a portion of those sales proceeds into the new residence, she will own a home free and clear; have a remaining $283,235.50 in non-retirement funds; plus, $417,682.00 in retirement funds. Mrs. . Doe can invest the $283,235.50 of remaining non-retirement funds for 7.5 years to generate income for herself until an age and time when she will be eligible for full Social Security retirement benefits.
If the $283,235.50 corpus is invested under the Conservative model, it will generate 4.49% per annum or $12,717.27, assuming LPL Financial’s forward guidance rates.
If the $283,235.50 corpus is invested under the Balanced model, it will generate 5.28% per annum or $14,954.83, assuming LPL Financial’s forward guidance rates.
If the $283,235.50 corpus is invested under the Growth model, it will generate 6.56% per annum or $18,580.25, assuming LPL Financial’s forward guidance rates.
Since we don’t have a value for Mr. Doe’s law practice at the time of preparing this report, Mrs. Doe’s cash available for investment will be either more or less than the $283,235.50 set forth for illustrative purposes in the investment income analysis. When a final distribution of marital property is complete, Mrs. Doe’s investment income can be calculated by multiplying the cash available for investment by the applicable rate(s) for each investment objective.
It is important to point out that if the past 5 year or 10 year performance results are used instead of LPL Financial’s forward guidelines rates, it will result in far more income for Mrs. Doe.
2) Retirement Accounts:
If the $417,682 in retirement accounts is invested for 7.5 years from now until Mrs. Doe reaches age 67, based on the more conservative rate of return for a balanced portfolio, when Mrs. Doe reaches age 67, this corpus would be worth $614,587.
3) Social Security:
A review of Mrs. Doe’s Social Security benefits indicates that her full retirement benefit beginning at age 66 and 10 months equates to $1146 per month. A review of Mr. Doe’s Social Security benefits indicates that his benefit will be $2905 per month. Mrs. Doe is eligible to receive benefits based on her own record or half of Mr. Doe’s benefits. Half of Mr. Doe’s benefits amount to $1452 per month or $17,430 per year. Also, if Mrs. Doe survives Mr. Doe, her Social Security benefits would double.
H) Sources of Income:
At age 67, Mrs. Doe would have at least $283,235.50 in non-retirement assets and $614,587 in retirement assets. Collectively she would have $897,822.50. If she were to convert this amount into an immediate annuity that would provide her with a lifetime guaranteed stream of income beginning at age 67, she would receive $58,358 per year. This coupled with Social Security income of at least $17,430 would result in guaranteed income for life of at least $75,788 per year. In addition, she would own her home free and clear.
All opinions rendered herein are made within a reasonable degree of professional certainty.