John (47) and Mary (46) Roberts are hard workers and have been doing well saving for their future and focusing on their current income opportunities. After an early career as an international human rights attorney, John is currently a Senior Counsel for GNC Corporation. Mary was once a broadcast journalist but is now a homemaker and community volunteer. John and Mary have two children: 1 son and 1 daughter. Their daughter, Amy, is a senior at KSU and plans to attend dental school in the fall of 2017. Their son, Brendon, is about to start his junior year of high school.
John earns $300,000 per year. GNC currently offers a 401(k) plan to all of its employees. The 401(k) plan offers a 50% matching contribution upto 6% of pay. However, it is not a safe harbor plan and the ADP for non-highly compensated employees is 4.5%. John is a highly compensated employee. John currently has $210,000 in his GNC 401(k) plan.
As an executive of the company, John also has access to a non-qualified deferred compensation plan. The plan is designed as a Rabbi trust. Eligible employees must make annual elections prior to the start of the next calendar year regarding how much of their pay checks they want deferred. They can defer up to 25% of their pay annually. John currently has $250,000 in his deferred compensation accounts and that money is scheduled to be paid out when he turns 55. Money is deferred until age 65, or for a period of at least 6 years (in-service distribution).
In addition to these benefits, John was also offered non-qualified stock options. In 2011, he was granted 100,000 options with a strike price of $5.50. When the options were granted, the strike price was higher than the FMV of the stock. GNC went public in 2012 and John exercised and sold 30,000 shares at $22.00. He used that cash to purchase and furnish a 4,000 sq. ft. lake home. On Feb. 22, 2015, he exercised 30,000 options at $41.91. He is still holding the GNC shares. He still has 40,000 non-qualified options remaining.
Outside of his GNC benefits, John has $100,000 in an old 401(k) plan that is currently invested. John has exceeded the social security wage-base for the past 18 years, prior to that he earned approximately $50,000 per year. Johnand Mary plan to retire at 55 to devote their lives to human rights issues. Both of them are in excellent health and will likely live a long time. They would also like to help their children with down payments on their homes ($50,000 each) when they settle down. Family is very important to John and Mary and they plan to visit their children regularly, or bring them all back together for family gatherings. Their mortgage on their primary home is currently paid off and they live a relatively modest lifestyle (they both drive Hondas and the kids drive even older ones).
Please assume inflation will average 4%. John and Mary are very aggressive investors; however, markets are very volatile. Please assume a long-run average investment rate of return of 9% prior to retirement and 7% after retirement. Short-term deviations from this percentage are very likely. John and Mary are unsure when they would like to start Social Security benefits, please advise them regarding this.
Please prepare a written retirement plan for John and Mary. As you will need to make certain assumptions in order to complete this project, please list those assumptions very clearly. You will need to cover the following items, at a minimum.
- Wage Replacement Ratio - give them a couple of options
- Assume that the children's education (including any graduate school for Brendon) will be covered by current income.
- Funding $50,000 for each child at age 25
- Anticipated Social Security income using http://www.ssa.gov/oact/quickcalc/ to estimate
- 401(k) deferral
- Rabbi Trust deferral
- Company shares (currently trading at $43.00)
- Stock options
- Distribution Strategies
Be sure to include an executive summary addressed to the clients and supporting calculations.