“It Takes a Village” is a historical proverb that reminds us that we are stronger when we combine our strengths than when we attempt to do everything ourselves. My strength is organizing things! I started BRPS to help others organize their financial and legal lives.
Starting BRPS Consulting and successfully running it has also taken a village. As such, I want to thank everyone who has provided feedback throughout this process. I hope you continue to give me constructive feedback to continue to improve my business.
One piece of feedback I continually get is that my potential clients do not understand how BRPS’ services apply to them. They can’t visualize the relevance. I hope to resolve this issue using actual case studies.
For the next several weeks, I will highlight a BRPS service with a case study. This week, we will focus on the BRPS service of Spending Plan Development, Implementation, and Monitoring Plan.
Sarah’s Spending Plan
Sarah is a 70-year-old retired nurse who is in the process of divorcing her husband. She wishes to move closer to her children and buy a house to accommodate her vast amount of personal belongings. Sarah’s credit is not stellar, as she has difficulty paying her bills on time and uses several credit cards.
Sarah requested assistance from BRPS to develop a spending plan, implement that spending plan, and monitor Sarah’s spending. The first meeting with Sarah consisted of pulling together her balance sheet, which details a person’s assets (home, cars, personal property, etc.) and liabilities (mortgage, credit card debt, student loans, etc.) In addition, we documented Sarah’s monthly income and expenses to determine whether her monthly cash flow was positive or negative.
The findings were as follows:
- Sarah had more debt than assets, this is common in America, but is not an ideal situation for a 70-year-old.
- Sarah had three retirement accounts, which she was not drawing on. For Sarah, the required minimum distributions would start at 70.5 years (today it is 72); therefore, this was an immediate concern when she came to me.
- Sarah’s monthly cash inflows were more than her cash outflows. However, she was paying the minimum due on her credit cards, paying several bills late, and not using excess monthly income to reduce debt.
How BRPS helped.
Asset / Monthly Income Review:
When a person retires, he/she will likely have a Social Security payment and a 401(k) or another similar retirement account. Some may also have an annuity and/or pension, in addition to social security and 401(K). BRPS reviews its client’s past tax returns and attempts to maintain annual income at the tax bracket that supports the client’s lifestyle. The current Federal tax brackets range from 10% to 37%.
- As Sarah would turn 71 on her next birthday, she was going to have to start her required minimum distributions (RMDs) in this tax year. BRPS assisted Sarah in calculating her RMD and the maximum amount she could withdraw while staying within a 15% tax bracket. The 15% tax bracket was higher than the RMD, so Sarah chose to withdraw the higher amount.
- BRPS assisted Sarah in determining how to receive the RMD, a lump sum during the year, or monthly payments. For Sarah, it made sense to take a small monthly withdrawal and a larger lump sum payment. The pros of monthly payments are that a client can match his/her income to expenses. The pros of lump-sum payments are that a client can determine which securities to sell and when to sell them.
- BRPS assisted Sarah in consolidating her retirement accounts. Many people believe they are more diversified if they have several different investment managers. BRPS believes the cumulative expenses for several investment accounts exceed the expenses of one investment account. Therefore, a client can save money by consolidating accounts.
- As a separate engagement – Monitoring of Financial Accounts for Suspicious Activity, BRPS can review the current investment manager accounts and inform the client about whether the investment mix is consistent with the person’s age, which accounts have the lowest expenses, which mutual funds are currently performing better (which is no assurance that they will continue), and which managers have positive customer service rating. BRPS CAN NOT recommend which investments to invest in. BRPS can assist with a conversation with a person’s investment manager.
UPDATE
Thank you, Boomerbaggage, for this excellent article on Required Minimum Distributions. Follow this link to learn more.
In addition, AARP has an easy-to-use calculator, enabling anyone to calculate, their RMD. Follow this link.
BRPS reviewed Sarah’s balance sheet and determined that a couple of her assets should be transferred to her soon-to-be ex-husband as part of the divorce proceedings, to eliminate those assets and related liabilities from her balance sheet and to retain her retirement accounts in full. This recommendation only worked, as her soon-to-be ex-husband wanted those assets.
Liability / Monthly Expense Review:
A review of Sarah’s liabilities revealed three credit cards, all with balances. Sarah maintained the credit cards because of the rewards she received from them. BRPS reviewed each credit card and determined that one card was superior to the other two cards for rewards.
As part of the spending plan, BRPS recommended Sarah pay off her lowest balance credit card with monthly excess cash flows until it was paid off, then continue putting excess cash flow on the next lower credit card, until finally, only one credit card remained. Sarah should continue to utilize excess cash flow until the final credit card has a balance of zero. After reaching a zero balance, BRPS recommended that Sarah use that credit card for all purchases to maximize rewards. Sarah was instructed to pay the credit card off twice a month. Paying off your credit card twice a month can eliminate interest charges and late fees.
NOTE: Many retailers are now giving a discount for using cash. That discount is often greater than the rewards being earned. Therefore, each purchase should be analyzed to maximize the discount/ rewards. Sarah has been visiting her bank ATM (no fees for withdrawals) to get cash, as the cash discount for many of the small business restaurants she frequents is better than her rewards.
Sarah wanted to purchase a house, but her current balance sheet and credit score, would not make that possible. Luckily Sarah had a child that was willing to hold the mortgage for her after BRPS showed the child that Sarah’s spending plan could support a mortgage payment. There is a drawback to this, as in NY, Sarah should have been eligible for the enhanced STAR award, however with another person listed as an owner of her home, she was not eligible for the enhanced STAR award and is only receiving the basic STAR award. As such, this is not a recommendation to take lightly.
Conclusion
Sarah has done an excellent job sticking to her spending plan. Both her savings and checking accounts have sufficient balances. BRPS has begun to talk to Sarah about investing that money, but that is part of BRPS’ Monitoring of Financial Accounts, which will be next week’s case study.
Every client’s circumstance will be different, but BRPS is confident that it can help all clients get their financial and legal lives in order. Not the service you are looking for, check out all services offered by BRPS Consulting here.
Let’s find out how BRPS can help you!