John and Mary Burke Case

John and Mary Burke Case
Finance 553 John and Mary Burke Case

Establishing the Client Relationship Initial Contact Acknowledging Referral (why is this important?) Documentation of all aspects of client engagement Dates and meeting schedules Correspondence Notes Outline and Communicate General Expectations Information from clients Services from your firm Costs

Engagement Letter (required in your case) What services you will provide Reviews and Recommendations Will be based in part on information client supplies General Outline of activities Data analysis and review Adjustments, alternatives, future meetings Clients are responsible for all decisions Fees and Payment Dates Termination option(s) and final billing

Appendix One – Fundamentals Professional Standards of Conduct with Client Confidentiality Fiduciary Prudent Judgment To Employer (or your organization) Loyalty No improper conduct Financial Planning Process Diagram of Steps (page 354) Use in your presentation to show each phase Can use in your conversation with clients to show overview of process

Clients Data Family Information John Burke – age 30 Previously married (divorced from first wife) Father of Patrick age four from previous marriage Monthly support of Patrick $350 (until 18 years of age) Patrick lives with mother (out of state) Owns term life insurance policy with former wife (Kathy) as beneficiary required by divorce agreement (contingent beneficiary Patrick) Patrick’s education fully funded by 529 plan from Kathy’s father Mary Burke – age 30 Couple married for three years John works as assistant manager for Atlanta Gas -- $36,000 salary Mary works as administrative assistant -- $26,000

Client’s Data Stated Goals of Clients – Short Term Adopt two children in next few years Increase Savings Retire Debt Save for down payment on a home (target 20%) House at today’s price -- $180,000 Three years away Inflated price, at 3% inflation is $196,691 Down payment at 20% is $39,338 Closing Costs? Not addressed (add about $4,000) No specifics on amount of increased savings or reduced debt No priority listing of the three short term goals

Increase Savings Current Budget has annual savings ($5,702) Home purchase $2,500 401 (k) $1,080 (plus additional employer match of $540) Discretionary Cash Flow $1,042 Investment Income is $1,300 All discretionary income comes from investment income With Discretionary Cash Flow, savings 9.0% of gross income Current Savings $27,000 (excluding 401(k)) All applied to emergency fund – over 6 months Major Problem is that couple spends too much of its income and increased savings not possible under current spending

Decrease Debt – Current Debt $78,345 Credit Cards -- $14,000 (high interest rate at 18%) Student Loans -- $54,298 (interest rate 6.9%) Auto Loans - $10,047 (interest rate 4.75%) Current annual debt payment $14,295 (student loans, auto loans and credit cards) Payments represents 22.6% of gross income Assets available to pay off debt $27,000 (excludes 401(k)) Cash $3,000, Stock holdings $12,000, Mutual Fund $12,000 Could add personal assets (Scooter at $2,000) If Emergency Fund lowered to 3 months (two stable jobs) – need $10,000 so $14,000 (before taxes) could be used for debt reduction

Basic Costs of Proposed Home Purchase ($4,000 closing costs added to price of the home) Bank Lending Rate for 30 year fixed is 5.5% Twenty Percent Down – Required savings $43,339 P&I payment ($196,691 cost minus down payment) $893.43 Homeowner’s Insurance and Property Tax (1% each) $327.82 Total Monthly Cost $1, or 23.6% of monthly gross Increase over current housing cost of $ per month Ten Percent Down – Required savings $23,669 P&I increases to $1, and adds Private Mortgage Insurance of $85.00 per month – total monthly payment $1, (27.4% monthly gross) Increase over current housing cost of $ per month

Medium Term Goals Education Expenses (future children) Support education of children (adopted) No support for education of Patrick Want to contribute $20,000 per year to college expenses for each child Want to contribute for 4 years (undergraduate) Anticipate college costs rising at 5% per year Cost of college Assume adoption in next two years Future costs are, Year 1 -- $106,132, Year 2 -- $111,439, Year 3 – 117,010, and Year 4 -- $122,861 Present Value of $79,112 (at 8.5% return on investments) Required Annual Annuity $7,941 (for twenty three years)

Long Term Goals Retirement only stated goal Retire at 65 to 67 (35 to 37 years away) Only John currently has 401(k) account with $4,320 balance Mary has option to join 401(k) plan with employer 25% match Annual contribution to account is $1,080 and employer contribute match of $0.50 per $1 up to 6% of salary Combined Future Value of 401(k)s with 8.5% return rate and 4% annual increase with full participation is $1,596,916 (at age 67) Believe that Social Security will not be there for retirement Current OSADI projections have minimum 70% of current payment rate viable through 2090 (need to include in retirement planning) High Future Value, 100% replacement of $62,000 wages at retirement with 35 years to retirement and 3% inflation– $2,091,000

Financial Data Income Statement (page 200) Revenue (with passive income) $63,300 Savings (not counting match) $3,580 – 5.7% Taxes $17,403 – 27.5% Non Discretionary $39,775 – 62.8% Discretionary (vacation) $1,500 – 2.4% Free Cash Flow (remainder) $1,042 – 1.6% Additional Information John (k) plans is an employer match up to 6.0%, currently only withholding 3% -- Mary – employer 25% match up to 3% not used Burke Salaries should increase 4% annually for the next five to ten years (good target for careers)

Financial Data Total Assets $88,820 Assets Cash and Cash Equivalents $3,000 – 3.4% Investments $24,000 – 27% Retirement account (deferred tax account) $4,320 – 4.9% Personal Use assets $57, % Total Liabilities $78,345 (adjusted to $79,209) – 89.2% Current Liabilities (Credit Cards) $14,000 – 15.7% Deferred taxes (401(k) account) $864 – 1.0% Long term Liabilities (student and car loans) $64,345 – 72.4% Net Worth $10,475 (adjusted to $9,611) – 10.8% Additional information – Student loan 6.9% ten year loan

Financial Data PASS Scores John’s total score is 25 (RT4 low end) Mary’s total score is 22 (RT3 middle) Combined total score is 23.5 (border RT4/RT3) Couple relatively young Portfolio Investment Allocation Short –Term basic balance is 80% bonds and 20% stocks Medium – Term basic balance is 30% bonds and 70% stocks Long – Term basic balance is 15% bonds and 85% stocks Small Portfolio holdings Mutual fund is balanced fund and $12,000 current value Equity holdings, 1,000 shares of Crossroads value $8,000 and 100 shares of Gladwell value $4,000

Financial Data Insurance Policies Life Insurance John has two policies – one that is court ordered from divorce for Kathy (Patrick) that has $500,000 face value and an employer plan of $50,000 with Kathy still listed as beneficiary Mary has employed sponsored plan of $26,000 with John as beneficiary Need to change beneficiary on John’s second policy to Mary Health Policy via John’s work (policy out of line with ACA with lifetime limit of $1,000,000 per person) Disability Insurance John’s policy is “owned” and 90 day elimination period (3 month) and 60% coverage Mary has disability through employer (will need to check specifics)

Financial Data Insurance Policies (continued) Renter’s Insurance – HO4 policy at $600 per year, with $25,000 property and $1,000,000 liability Automobile Insurance – Policy on John’s car Policy on Mary’s car No policy on John’s scooter (need more information on this vehicle) No Long-term care insurance No Personal Liability Umbrella Policy (PLUP) Investments Stock holdings – 1,000 shares of Crossroads and 100 shares of Gladwell Mutual Fund – balanced fund and employer sponsored 401(k)

Financial Data Tax Returns Not provided but the average tax rate (federal) is 17% and the marginal tax rate is 25%. No state income taxes Legal Documents John’s Last Will and Testament for John – beneficiary is Patrick Need to change beneficiary to Mary Mary no Will Common Law Property State No Durable Power of Attorneys No Advanced Health Directives

Overview of Goals, Initial Assessment Down payment at 20% for home in three years -- $13,000/yr Need $4,000 from current assets for closing Education for adopted children to start in two years -- $8,000/yr Needs to wait until after down payment on house completed Retirement by maximizing 401(k) employer match - $1,860 Fund from next salary increases (anticipated 4%) Match from employers grows from $540 to $1,275 Debt reduction credit cards with highest interest rate - $14,000 Equity portfolio $12,000 (before tax) plus scooter or mutual fund Goals not attainable under current income and spending habits – funds not available for down payment on house

Checklist of Items that need immediate attention Legal Documents Draw up Will for Mary Draw up Power of Attorney’s for John and Mary Draw up Advance Health Directives Retirement Plans Change beneficiary on John’s 401(k) Review Insurance Needs (Risk Assessment) Catastrophic Risk needs to be mitigated (Life Insurance Policies updated and level of coverage) Change beneficiary on Life Insurance policy owned by John from Patrick to Mary Get information on Mary’s disability insurance coverage

Checklist of Issues for Review Budget and Savings – current spending rate and savings Emergency Fund – sources of funds and coverage (number of months) Impact of 401(k) potential changes on budget and savings Priorities on Goals Increase Savings For Down Payment for House For College for children (no children yet) For Retirement (35 to 37 years away) Debt Reduction (major issue) Home Purchase Size and Timing

Data Analysis Insurance Review – Risk Analysis Current Coverage Benchmark Coverage Present Situation – Spending and Savings Budget – Pie Charts and Benchmarks (Age Appropriate) Cash Flow Analysis Net Worth – Pie Charts and Benchmarks (Age Appropriate) Financial Ratio Analysis Key ratios on changing budget and building net worth Change in Cash Flow (projected) Projected budgets

Risk Assessment – What are the objectives What risk does the client(s) have with respect to Loss of Life or Income Stream? Loss of Property due to “acts of nature” or others? Loss of Good Health due to accident or medical issues? What losses can the client(s) afford to own? What losses can the client(s) not afford to own? What are the ways to mitigate or avoid the losses they cannot afford to own? What are the costs of these products that can mitigate or avoid loss? What are the options to reduce some of the costs of these products that can mitigate or avoid loss? What events will alter or change the risk exposure of the client(s)?

Risk Assessment (Insurance Needs) Life Insurance Needs -- Minimum Current coverage for John and Mary is too low… John has $50,000 (change beneficiary to Mary, no cost) Mary has $26,000 Kathy (ex-wife) owns $500,000 policy on John’s life (no change) What should the Life Insurance cover today? Replace spouse’s income Funeral Costs Replace John’s income for Mary and Mary’s income for John Ten times salary (low end) Increase term-life insurance (ten year policy) to $360,000 for John and $260,000 for Mary (ways to estimate the amount needed?) Anticipated costs $275 for John and $130 for Mary

Risk Assessment (Insurance Needs) Health Care Policy through John’s work sufficient Disability John’s coverage through company sufficient Mary is not covered – check with company benefits to see if disability insurance is available and match John’s (90 day, 60% replacement) Note – emergency fund should be three months (90 days) to cover the waiting period on disability insurance Long-term Care – not needed at this time Anticipated additional annual costs for Mary’s disability insurance via company should be around $300 per year if company sponsored or $600 if purchased directly

Risk Assessment (Insurance Needs) Property and Casualty Home owner’s (Rental Insurance) Coverage Sufficient (Net worth $88,000 and liability coverage is $100,000) Contents is $25,000 and equal to property and furniture Automobile and Scooter Upgrade to more realistic coverage of 100/300/50 for each vehicle Either insure or sell scooter Additional costs of upgrading personal auto policy is $400 per year Liability Insurance With increase in personal auto policy and current renter’s coverage of $100,000 and net worth $88,000 no need for umbrella policy Total additional cost for P&C insurance is $400 per year

Present Situation – Budget and Spending Analysis Looking at the two financial statements for current position Income Balance Sheet Where is the couple with regards to benchmarks at this time? Key items include, savings rate and current net worth Pie charts to illustrate spending and savings What is a reasonable change to spending and savings Where will future “raises” go? What “behavior” needs to change to meet goals? What timelines should the clients be on for some of their goals? What are some immediate changes that can be made to impact financial position?

Income, Spending and Savings Pie Chart for visual reference and comparison to “standard” for strong financial strength. Table and Pie Charts on page 206 Key difference between benchmark and clients is debt payments Debt benchmark is 12% but clients at 22% High Debt prevents meeting other needs and goals Savings rate low and not close to benchmark Coverage in insurance low and thus carrying too much risk Inability to take advantage of employer’s 401(k) match Looking Forward Anticipated salary raises (4%) over next five years Desire to move into house and out of rental property

Balance Sheet (Net Worth) With Pie Charts (page 205) Assets are heavy in personal use and very light in cash and cash equivalents Investment accounts low Emergency Fund low but with the mutual fund, the couple has access to funds that cover this area ($12,000) Candidates for Immediate Change Change pie chart to reflect mutual funds in cash and cash equivalent for calculating emergency fund (add in $15,000) Investments are available for debt reduction ($12,000 potential minus capital gains tax on sale of stock) and uninsured motor scooter ($2,000) Long-term liabilities are high Major item is student loan ($54,300) with modest interest rate

Financial Ratios Key ratios for clients to review and understand Liquidity Ratios – Short term financing issues How long can you cover an abrupt change in income? What sources do you have to cover abrupt change in income? John and Mary’s numbers Emergency Fund using just cash and cash equivalents ($3,000) Estimated non discretionary monthly cash flows ($3,315) Coverage is 0.91 months (very weak against 3 month benchmark) Include mutual fund of $12,000 as accessible funds for emergency Coverage is 4.52 months (strong against 3 month benchmark) Current ratio without mutual fund 0.21% (weak) with mutual fund 1.07 and at low end of good benchmark range

Financial Ratios Debt Ratios Long term solvency issues Can current income meet debt servicing Does ratio impact future borrowing capacity (potential for mortgage)? Housing Ratio 1 for John and Mary Current housing costs (renting costs of $9,000) Current gross income ($63,300) Housing Ratio 1 – 14.22% and well below maximum of 28% Housing Ratio 2 for John and Mary Current Housing Costs and Debt Payments ($23,295) Housing Ratio 2 – 36.80% above maximum of 36% Will hurt credit scores and potential mortgage qualification

Financial Ratios Debt Ratios Continued Debt to Total Assets and Net Worth to Total Assets Debt to Total Assets = 1 – Net Worth to Total Assets This ratio varies with age and Debt to Total Assets falls as couple approaches retirement (less income to handle debt) Total Liabilities is $78,345 (book), $79,209 with tax-deferred account Total Assets is $88,820 Debt to Assets 88.21% (book), $89.18% adjusted Very Weak – benchmark is around 80% for young couples Net Worth builds over time Net Worth to Total Assets is 10.82% and below target of 20% for young couple

Financial Ratios Debt Ratios Continued Examine the “quality of debt” for couple with high Debt to Assets ratio Debt is in three parts – auto loans, student loans, and credit cards Credit Card debt is $14,000 and at 18% interest – number one priority to eliminate – should use some current assets Trade-off of debt payment at 18% versus earnings of 8.5% Student loan is $54,298 with 6.9% interest Ten year loan with annual payments of $7,695 per year Stay on schedule with this loan Auto Loans are $10,047 with 4.75% interest rate Only 36 months remaining

Financial Ratios Financial Security Savings rates and Investment Accounts Careful not to overemphasize rates with long horizons – couple has years to monitor and adjust – but need to have perspective on current habits that might be hard to change Savings Rate Savings of Individual and Employer Match ($3,580 + $540) now but with full 401(k) participation ($5,440 + $1,275) As a percent of gross pay 6.5% now, raised to 10.6% with increase in 401(k) and with benchmark of 10% - 13% for current age Investment Rate Cash and Investments total $31,320 and ratio to gross pay is 0.49 to 1 Below benchmark of 1:1 and will fall if assets used to reduce debt

Financial Ratios Performance Ratios For this case no history of performance but if clients will be long-term clients you will start accumulating data to measure annual performance Return on Investments (sensitive to portfolio make-up and market performance) Some measures you can use, Sharp Measure or Treynor Measure or Jensen’s Alpha (Appendix 3 pages 368 – 369) Based on Risk and Return (Security Market Line and Capital Asset Pricing Model) – review Bond Performance – function of duration Return on Assets (balance sheet change in assets) Return on Net Worth (balance sheet change in net worth)

Future Income Statements Projections over the next five years with increase in salaries Illustrate spending and savings pattern change Illustrate some alternatives with delaying Home purchase Education Savings Illustrate some alternatives with using current funds to reduce debt Important to show what choices will mean going forward (Spreadsheet with Scenario 1) Example with using raises to fund 401(k) Example with selling some investments to lower debt Example with selling scooter for debt reduction and risk management Example with new insurance products

Future Income Statements Immediate Changes Sell Stock (Net $10,000 after tax) Sell Scooter (Net $2,000) Pay off Credit Card debt with cash and proceeds Keep monthly balance of credit cards at zero going forward Use as an emergency fund if necessary Allocate most of raises to full invest in matching 401(K) accounts John’s raise $1440 and use $1, for 401(K) Mary’s raise $1,040 and use $ for 401(k) Will have a tax impact so that entire increase to 401(k) of $1, will have a tax offset of $ (at 25% marginal tax rate) Review Spreadsheet with Net Cash Flow increasing to over 6%

Future Balance Sheets Five year projection matched to income statement based on changes for income statement Raises at 4% Reduce Debt with Stock sell-off and scooter sell off Down payment goal of 10% Delayed start in education savings for five years Change to insurance policies to cover risk exposure Projections assume no major changes in activities or household other than Purchase home at end of three years Adopt children in fourth year

Future Balance Sheets In five years – Net Worth increases to $107,000 and is 33% of your asset base, an eleven fold increase over five years ROA over five years is ($317,892/$88,820)(1/5) – 1 = 89% due to financial leverage with purchase of a home ROI is projected to stay at 8.5% Cash and Cash Equivalents and Mutual Fund holdings are $41,651 and is 55% or 0.55:1 of gross income but an increase of $5,500 over current holdings with the sell-off of the stock. 401(k) accounts have grown to $33,679 by using the first 4% raise to fund these accounts Home Equity is $36,550 or 17.5% of the value of the house

Financial Recommendations and Alternatives Goal Matching – Retirement Increase of 401(k) and reasonable estimate of social security benefits at age 67 will be sufficient to replace 100% of current income and live to 100 However, Investment rate is set at 8.5% for the entire period Reduction in risk tolerance could reduce both funds available and or the length of payments from fund Need to review the performance annually to see if you are still on target for $1,600,000 goal with 401(k) accounts Other future options Start IRA or Roth accounts should savings be available Add to mutual fund account

Financial Recommendations and Alternatives Goal Matching – Education No need to begin today Wait until adoption takes place and you are “settled” in your home Goal of 100% funding for children May elect to alter in future – depending on scholarship potential, work contributions of children or other unknown sources of income Will be able to support some of expenses out of current income when children go to college (reduction in at home expenses can be used to fund college) Change in education costs in the future may impact your target When adoption is completed Explore various plans (529s) for tax deferred savings New estimates based on current salaries

Financial Recommendations and Alternatives Goal Matching – Education – Continued If you want to start today Set up two 529 plans, one for each “anticipated” child Set up yourself as beneficiary Start with a modest annual contribution Will need to modify savings for other goals Reduce funds for down payment on a home Look at loans requiring 10% or 5% down Interest rate on loan will go up Additional interest expense is tax deductible Could lower insurance coverage and take on more risk

Financial Recommendations and Alternatives Debt reduction Sell stock and scooter and pay off credit cards Use credit cards for means of payment Pay off balance every month (free money) Builds up credit score Could reduce mortgage interest rate as credit score improves Keep scooter and purchase necessary insurance Monthly expenses increase Funds available for debt reduction decreased Make up by using some funds from mutual fund for debt reduction Mutual funds also “emergency funds” Eliminate high debt (18%) and start to rebuild stock portfolio Example demonstrates future advantage of paying off debt now

Sell Stock Keep Stock Use $12,000 to reduce debt and invest “payments needed to payoff debt” Monthly cash flow increases by $355.51 Invest monthly savings at 8.5% for five years Future value of investment is $26,465 Disadvantage – lose access to $12,000 now Keep $12,000 investment and determine monthly cost to eliminate debt in five years $14,000 balance at 18% with 60 payments Monthly payment $355.51 Let portfolio grow at 8.5% for next five years Future value is $21,382

Financial Recommendations and Alternatives Increase Savings Max out 401(k) with increased salaries (one-time 4% increase) Take the projected salary increase and pay yourself first Forced savings plan Tax benefit Employer Match (free money) John’s increase is $36,000 x 0.04 x (1 – 0.25) = $1,080 Plus small tax credit as increase in salary is only $360 after tax so taxes increase on $90 and net cash flow is up $270 Company match is $540 additional dollars Mary’s increase is $26,000 x 0.04 x ( ) = $780 Change in cash flow is $195 and now company match is $195

Keep Raise and Self Invest Use Raise for 401(k) Take all after-tax dollars of the raise and invest Raises equal $2,480 Taxes on raise $620 Could use IRA and get “taxes” back with deferred account Additional funds for investing each year is $2,480 Future Value with investing over five years at 8.5% is $15,384.77 Maximize 401(K) with pay increase John uses $1080 of before tax raise and gets $540 match Mary uses $780 of before tax raise and gets $195 match Total invested $2,595 All extra cash flow in IRA and get “taxes back” $620 Future Value in 5 years at 8.5% is $19,944.37

Financial Recommendations and Alternatives Increase Savings Alternatives with raise Could use money after 401(k) for other goals and not start IRA Funds relatively small $620 before tax, $465 after tax annually Funds some of the new insurance costs with new life insurance policies or auto policy upgrades or rental policy upgrade or adding insurance for the scooter or adding PLUP plan or adding personal disability plan for Mary Could start 529 plans Could use for more vacation spending Could use for emergency fund build up If no changes to 401(k) accounts Lose employer match of $735 Could use after tax dollars for debt reduction, insurance changes, or savings and keep some of the stock currently owned

Financial Recommendations and Alternatives Entertainment Spending Only $1,500 per year seems very low for entertainment (vacation) What types of activities do you envision over the next five years and will that change with the adoption of two children? If this will change need to account for this in spending pattern Current projected income statements for next five years have discretionary spending increasing from $155 in year one to $5,113 Increases are in Savings account in balance sheet and accumulate to over $10,000 If you hold to your new budget these funds are available for discretionary spending

Summary of Minimum Recommendations Reduce Debt with sell of stock and scooter – no cost increase Eliminate credit card outstanding balance Stay on course with student loan and car payment Increase savings via 401(k) accounts with employers using 4% raise next year – no cost increase This accomplishes two things (1) increases annual savings with employer’s match above 10% of gross income and (2) projects to be sufficient to meet retirement funds of nearly $1,600,000 (with support from social security) Insurance changes for risk reduction – cost increase is $1,105 Add life insurance policies (ten years of current salaries $360,000 for John and $260,000 for Mary)

Summary of Minimum Recommendations Insurance continued Add disability insurance for Mary – hopefully through company group plan Change beneficiary on current life policy to Mary (or when you increase face value to $360,000) Increase auto coverage Down Payment on House – change to 10% down payment target, increase in cost (additional annual savings) is $6,300 Legal Documents – one time cost of $1,000 Change beneficiary on John’s will (no cost) Add Durable Power of Attorney’s for each other Add Advance Health Directives

Summary of Minimum Recommendations Following these minimum recommendations in five years with steady markets, following current spending patterns, and receiving annual raises of 4% Sufficient funds for house purchase at the end of three years and debt structure should be sufficient to qualify for “good” mortgage and rate for House Ratio 1 at 22% below maximum of 28% Debt restructured and House Ratio 2 at 32% and under maximum of 36% Annual discretionary funds growing to $5,000 Savings rate in the 10% to 13% range – appropriate for age group Risk owned appropriate for current age and wealth Left to do on your current goals Start education savings

Actions for John and Mary Burke Next Three months Change beneficiaries on current Will and Life Insurance Purchase new life insurance policies Shop for new policies – Term life or whole life choice Set up Power of Attorney and Advance Health Directive Sell stocks and scooter– pay off current balance of credit cards Three to Six months Add disability insurance plan for Mary – will check with company for Change auto insurance policies for more appropriate coverage Six months to Twelve months When salaries increase – sign up and/or change 401(k) contributions Set up “account” for down payment on future home

Progress Benchmarks Three months Life Insurance policies purchased and proper beneficiaries John’s Will changed Completed Power of Attorney and Advanced Health Directives Credit card balance at zero Six months Disability Insurance for Mary (information from company received and if available Mary enrolled or scheduled to enroll at next opportunity) Met with insurance agent and new auto coverage limits established for next insurance payment One Year Raises used to increase and open 401(k) at maximum employer match Account set-up for savings for down payment on house

Future Engagements First follow-up in three months – anticipated meeting time approximately two hours Will review insurance policies Verify disability insurance potential (Mary’s company or private) Legal documents in place and beneficiaries changed Individuals named Advance Health Directive have signed acceptance Power of Durable Attorney’s properly filed with court Sale of stocks and scooter sufficient to clear credit card balance (or other assets needed to clear balance) Any new developments or considerations that impact goals Second meeting three months later – anticipate time of two hours Third meeting one year from now – anticipate time of two hours

Future Engagements Issues and Events that can require non routine meetings Births (adoptions) or changes to family Deaths (where you are a beneficiary of an estate) Health Issues Wealth Issues Job loss Gifts received of high monetary value Income changes (change to part-time employment, job change, etc.) Lawsuits Other issues that can impact your financial plan in either a positive or negative way Changes with guardianship with son Patrick for example Questions?

Follow – up and Check – list before clients leave My office will provide you with a copy of today’s information Recommendations Contact information for any party outside the office that was recommended to help with any action item Action Items (theirs and yours) Answers to your questions List the questions that you will be answering and target date for getting them the answer, for example Mary’s company policy on disability insurance Mary’s company policy on open enrollment dates for 401(k) and insurance Etc, Make sure all letters are signed and if necessary notarized, payments received or billing information on hand

John and Mary Burke Case Oral Presentation

The Clients John and Mary Burke Married for three years Both age 30 John has son by previous marriage Patrick, age 4 Patrick leaves with former spouse Kathy in another state John pays alimony for Patrick of $350 per month until Patrick reaches age of 18 John pays for life insurance contract of $500,000 with Kathy as beneficiary (Patrick as second beneficiary) and is required by divorce decree John works as an assistant manager earning $36,000 annually Mary works as administrative assistant earning $26,000 annually

Clients have indicated five major goals Goal 1 – Increase annual savings Goal 2 – Decrease current debt Goal 3 – Save for 20% down payment Time horizon 3 years Home value in today’s dollars is $180,000 Goal 4 – Adopt two children within next few years Goal 5 – Have a retirement savings plan that covers 100% of current income at 65 to 67 Current income is a combined $62,000 Social Security not part of retirement planning at this time In addition to these goals – need risk assessment

Financial Data Current Budget Provided by Clients Revenue (with investment income of $1,300) $63,300 Savings (not counting company match) $3,580 – 5.7% Taxes $17,403 – 27.5% Non Discretionary $39,775 – 62.8% Housing Costs $9,000 – 14.2% Living Expenses $12,280 – 19.4%% Debt Payments $14,295 – 22.6% Insurance $4,200 – 6.6% Discretionary (vacation only listed item) $1,500 – 2.4% Free Cash Flow (remainder) $1,042 – 1.6% See Pie Charts, spending against benchmark for couple (page 206)

Financial Data – Current Wealth Total Assets $88,820 Cash and Cash Equivalents $3,000 – 3.4% Investments $24,000 – 27% Retirement account (deferred tax account) $4,320 – 4.9% Personal Use assets $57, % Total Liabilities $78,345 (adjusted to $79,209) – 89.2% Current Liabilities (Credit Cards) $14,000 – 15.7% Deferred taxes (401(k) account) $864 – 1.0% Long term Liabilities (student and car loans) $64,345 – 72.4% Net Worth $10,475 (adjusted to $9,611) – 10.8% See Pie Charts and benchmarks for couple (page 205)

Data Analysis and Key Ratios Life Insurance Needs -- Minimum Current coverage for John and Mary is too low… John has $50,000 (change beneficiary to Mary, no cost) Mary has $26,000 Kathy (ex-wife) owns $500,000 policy on John’s life (no change) Increase term-life insurance (ten year policy) to $360,000 for John and $260,000 for Mary (minimum coverage) Anticipated costs $275 for John and $130 for Mary Health Care Coverage sufficient through John’s company Auto coverage needs to be increased – anticipated costs $400 Disability Insurance for Mary – anticipated cost is $300 No current need for PLUP on Long-term Care

Data Analysis and Key Ratios Debt Position of Couple very poor Housing Ratio 1 at 14.22% (good) Housing Ratio 2 at 36.80% (poor) Debt Payments as percent of Income 22% (very poor) Credit Card Debt is $14,000 over 15% of assets with high interest rate Savings Rate of Couple is low Savings as a percent of income (with employer match) is 9.0% below range of 10% to 13% Investments to Gross Pay is 0.49:1 and should be about 1:1 Current Ratio (Cash to Current Liabilities) is 0.21% and very weak Emergency Fund Counting Mutual Fund ($12,000) as part of cash is 4.6 months (good)

Data Analysis – Cost of Goals Increase Savings – reach strong position of 13% of gross income need to increase by $2,727 per year Decrease Debt – cost to eliminate credit card balance in five years is $4,266 per year Down payment of 20% for house in three years -- $13,000 per year Cost to fund education (20 years away) -- $7,900 per year Total Cost to meet all goals approximately $28,000 or 44% of current income Goals are not attainable with current spending and income Modification of Goals necessary for sound financial plan Postpone or reduce some of the goals so that they are attainable

Concerns and Issues First Concern is Legal Documents Need to change beneficiary on John’s will from Patrick to Mary Need to create Power of Attorney’s and Advanced Health Directives Need to change beneficiary on John’s 401(k) plan Second Concern is Risk Management Need to remove risk exposure to untimely death Need to remove risk exposure to disability (Mary) Need to remove risk exposure for accident (liability) Third Concern is Debt Position Need to immediately reduce credit card balance with 18% interest rate Assets (investment accounts) sufficient to remove debt

Concerns and Issues Fourth Concern is low Savings Rate Low rate impacts ability to meet down payment, retirement, and education goals Education goal is too ambitious at this point in time Down Payment percent is too high, do not need 20% down Fifth Concern is retirement funding is missing free employer match via 401(k) contributions John is at 50% of potential match Mary is not enrolled in matching program Sixth Concern is necessary changes required in spending and savings habits may not be easy for couple spending nearly all current income with minimal savings

Recommendations Reduce Debt with sell of stock and scooter – no cost increase Eliminate credit card outstanding balance Stay on course with student loan and car payment Increase savings via 401(k) accounts with employers using 4% raise next year – no cost increase This accomplishes two things (1) increases annual savings with employer’s match above 10% of gross income and (2) projects to be sufficient to meet retirement funds of nearly $1,600,000 (with support from social security) Insurance changes for risk reduction – cost increase is $1,105 Add life insurance policies (ten years of current salaries $360,000 for John and $260,000 for Mary)

Recommendations Insurance continued Add disability insurance for Mary – hopefully through company group plan, if not shop for private insurance disability plan John change beneficiary on current life policy to Mary (or when you increase face value to $360,000) Increase auto coverage for liability issues Down Payment on House – change to 10% down payment target, increase in cost (additional annual savings) is now $6,300 Legal Documents – one time cost of $1,000 Change beneficiary on John’s will (no cost) Add Durable Power of Attorney’s for each other Add Advanced Health Directives

Recommendations Following these minimum recommendations in five years with steady markets, following current spending patterns, and receiving annual raises of 4% Sufficient funds for house purchase at the end of three years and debt structure should be sufficient to qualify for “good” mortgage and rate for House Ratio 1 at 22% below maximum of 28% Debt restructured and House Ratio 2 at 32% and under maximum of 36% Annual discretionary funds growing to $5,000 Savings rate in the 10% to 13% range – appropriate for age group Risk owned appropriate for current age and wealth Left to do on your current goals – only one postponed goal Start of education savings

Income Statement Today Income $63,300 Personal Savings $2,500 Child Support $4,200 Retirement $1,080 Living Expenses $17,080 Debt Service $14,295 Insurance $4,200 Taxes $17,403 Discretionary $1,500 Net Cash Flow $1,042 Income Statement Five Years Income $76,539 Personal Savings $1,000 Child Support $4,200 Retirement $3,577 Living Expenses $29,128 Debt Service $7,695 Insurance $5,305 Taxes $18,782 Discretionary $1,739 Net Cash Flow $5,113

Balance Sheet Today Current Assets $3,000 Investments $24,000 Retirement $4,320 Personal Assets $57,500 Current Liab. $14,000 Long-Term Liabilities Student Loan $54,298 Auto Loan $10,047 Deferred Tax $864 Net Worth $9,611 Balance Sheet in Five Years Current Assets $14,491 Investments $18,043 Retirement $33,679 Personal Assets $251,678 Current Liab. $0 Long-Term Liabilities Student Loan $31,773 Auto Loan $0 Deferred Tax $6,736 Net Worth $107,266

Client Follow Up First follow-up in three months – anticipated meeting time approximately two hours Full review of all changes to insurance policies Verify disability insurance options (Mary’s company or private) Legal documents in place and beneficiaries changed Individuals named for Advance Health Directive have signed and acceptance responsibilities Power of Durable Attorney’s properly filed with court Sale of stocks and scooter completed and credit card balance cleared Any new developments or considerations that impact goals Second meeting three months later – anticipate time of two hours Third meeting one year from now – anticipate time of two hours

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John and Mary Burke Case

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