1. Assume that Michelle is self-employed. What are her retirement plan options?

2. By using the annuity approach, calculate the capital needed at retirement (age 67) for the Williamses. Assume a 9% after-tax rate of return. Base the calculation on Michael's salary only.

3. By using the capital preservation approach, calculate the capital needed at retirement for the Williamses to replace 70% of Michael's salary.

4. By using the purchasing power preservation approach, calculate the capital needed at retirement for the Williamses to replace 70% of Michael's salary.

5. Explain the key differences among the three approaches in Questions 2-4.

6. Use the capital need you calculated in Question 2 to determine whether the Williamses will be able to retire at age 67 with their current annual savings amounts (not adjusted for inflation). For current annual savings, use Michael's Section 401(k) plan contribu- tion plus the employer's match and assume that Michelle saves $4,000 per year from her earnings. Assume that all investment assets (regardless of how they are currently invested) will earn a 9% after-tax rate of return. Consider the checking account, money market account, and coin collection as nonretirement assets and thus not a part of this calculation. Do include the CD as a retirement savings asset.

Michael and Michelle Williams believe they have a solid financial future; however. they are concerned about actions they need to take to ensure college educations for two of their children and a secure future for a third child with special needs. They have come to you for assistance in determining how they can achieve these goals. Today is January lI El. Personal Background and lnfonnation Michael Williams {Age 35,1 Michael is a doctor who specializes in internal medicine. He is an employee of Lakeside Hospital. The salary that Michael earns compensates him for patients seen at both the hospital and the lakesideowned clinic. Michael is starting his sixth year of practice. He has been discouraged lately with the medical economic environment. Given the proliferation of managed care, he sees only a limited ability to increase his salary in the future and is concerned that his salary increases are not likely to exceed ination. Michelle Williams {Age 35} Michelle grew up in a middle class family and lost both of her parents to cancer in their early 50s. Michelle is a nurse but has not worked in her profession since her children were born. Michelle is fascinated with all things technological. She is a seller on an online auction site. Michelle has an uncanny sense for shopping for unique items that she buys, adds a markup. and resells. She marks up an item l'ih, does not sell the item for less than its markedaup priceI and charges me online buyer for all related shipping costs. For El, she has changed the dynamic of her business and expects to generate up to $90.0 net income after expenses from the business this year. Children Michelle and Michael have three children: Beau [age Tl. Elizabeth [age 5]. and Madison {age 1]. Madison has Down syndrome. Michael '5 Family Michael is an only child and has been his parents' pride and joy. Michael's parents {Frank and Isabelle} are firstrgeneration immigrants from England. Thw immigrated before Michael was born and operate a small neighborhood deli. Michael and Michelle met at the deli when Michelle worked there during her college years. The ebb and flow of community life through the deli still fascinates Michelle. and she often visits Michael's parents there. The elder 1|IIIFilliamses own the building [fair marker value. $4-,} that houses the deli. The neighborhood has seen needed renovations in recent years, and the future outlook for continued renewal is good. The deli enjoys a steady stream of loyal customers and has generated moderate wealth for Michael's parents. They are both 60 years old and are in fair health. Frank and Isabelle have no family in this country except for Michael. As they approach retirement, their primary concerns are the high costs of long-term residential and medical care for the elderly. Michelle's Family Michelle's parents are both deceased. Michelle is close to her only sibling, Joan (age 40). Joan is unmarried and has no children. Joan is particularly close to the Williamses children. In the past, Joan has mentioned to Michelle that she would consider assisting with the educational and maintenance needs of the children. Joan has given up her job as a business education teacher to be a full-time author of financial self-help books and works out of her home. To date she has enjoyed tremendous success and has raised her annual income from $45,000 per year to $100,000. Personal and Financial Objectives 1. The Williamses want to provide Beau and Elizabeth with up to $25,000 (today's dollars) per year for four years of college education. The children will be on their own for the costs of any graduate studies. 2. They want to assist Michael's parents in their retirement years, as needed. 3. They want to be free of mortgage indebtedness by the time Michael is 55 years old. 4. They want to design a retirement plan that will provide an income to replace 70% of Michael's preretirement income. 5. They want to make necessary arrangements for Madison so that she will be cared for throughout her adult life. 6. They want to maintain an adequate emergency fund of six months' living expenses. 7. They want to prepare proper wills and an estate plan. Economic Information They expect inflation to average 3%. They expect an educational consumer price index (CPI) of 5%. They expect Michael's salary to increase 3% annually.Rates are 3.5% for a 15-year fixed mortgage and 4% for a 30-year fixed mortgage. They are in a 24% federal income tax bracket and a 6% state income tax bracket. Any refinancing will incur 3% of the mortgage as a closing cost which will not be financed. Insurance Information Health Insurance Health insurance is provided for the entire immediate family through Lakeside Hospital. Lakeside Hospital's health insurance is through a preferred provider organiza- tion (PPO). The contract has a family deductible of $500 per year. If preferred contract physicians are used, the contract is an 80/20 major medical coinsurance plan. The family annual stop-loss limit is $2,000. Prescription drug, eye, or dental coverage is not included in the plan. The plan has unlimited lifetime benefits. Life Insurance Michael has elected $50,000 group term life insurance through the hospital. The hospital pays the entire premium. Michelle has maintained a $10,000 whole life insur- ance policy her parents purchased for her as a child. The cash value of the policy is $6,000 and the policy is paid up. Disability Insurance The hospital does not provide disability insurance for its employed physicians. Michael has purchased a policy through the American Medical Association. The policy provides own-occupation coverage for disability resulting from either sickness or acci- dent, pays a benefit of 60% of gross pay after an elimination period of 180 days, covers a term of 60 months with residual benefits, and is guaranteed renewable. Malpractice Insurance The hospital provides Michael with malpractice insurance and pays the premium. The policy covers Michael's work at both the hospital and in the clinical practice. Homeowners Insurance The Williamses currently have an HO-3 policy with a replacement value on con- tents endorsement. The deductible is $250 with a premium of $2,000 per year.Automobile Insurance Michael and Michelle have full coverage on both cars, including: $100,000 bodily injury for one person . $300,000 bodily injury for all persons $50,000 property damage . $100,000 uninsured motorist . $10,000 medical payments Deductibles are: . $500 comprehensive $1,000 collision Investment Information (Assumptions) Expected Return Beta Aggressive stocks 13.5% 1.7 Growth stocks 10% 1.2 S&P 500 Index 9% 1.0 Value stocks 8.5% 0.9 Bonds (corporate) 6.5% 0.6 Money market (bank) 1.75% 0.2 The Williamses consider themselves to be moderate risk-taking investors. Retirement Information Michael and Michelle would like to retire on or before age 67. They both expect to live to age 92. They would like to have a standard of living equal to 70% of Michael's preretirement income. They do not want to rely on Social Security benefits in planning for their retirement. During the past year, Michael began participating in a Section 401 (k) plan avail- able through Lakeside Hospital. Under the plan, the hospital matches $0.50 for every dollar contributed, up to 6% of his salary. The maximum contribution by the hospital is a total of 3%. Michael is saving 7% of his salary from Lakeside. Gifts, Estates, Trusts, and Will Information Neither Michael nor Michelle has a will. They realize the importance of having a will; however, Michael's schedule seems to preclude any time for finalizing one. They are most concerned about guardian care for Madison, while at the same time minimize ing as much estate tax as possible.STATEMENT OF CASH FLOWS Michael and Michelle Williams For the Year Ended December 31, 2019 CASH INFLOWS Salary-Michael $170,000 Gift from Michael's parents 20,000 Michelle's self-employment income 4,000 Interest 900 Total inflows $194,900 CASH OUTFLOWS Section 401(k) plan savings $ 11,900 Mortgage payment 20,700 Property taxes (residence) 1,800 FICA and self-employment tax 9,820 Federal income tax withholding 68,000 State income tax withholding 6,734 Utilities 3,980 Disability insurance premium 900 Homeowners insurance 2,000 Auto notes 10,789 Auto expense and maintenance 1,200 Auto insurance 2,400 Housekeeping service 2,400 Educational loan repayment 6,915 Clothing and dry cleaning 5,600 Food 5,750 Entertainment 3,970 Miscellaneous 5,998 Total outflows $170,856 Net cash flow (surplus) $ 24,044STATEMENT OF FINANCIAL POSITION Michael and Michelle Williams January 1, 2020 Assets Liabilities and Net Worth? Cash/cash equivalents Current liabilities Checking account JT $2,500 Credit card balances 550 Money market account JT 5,000 Auto loan (Audi) 25,000 Auto loan (Toyota) 18,000 Total cash/cash equivalents $7,500 Total current liabilities $43,550 Invested assets Long-term liabilities CD JT $15,000 Home mortgage $225,000 Section 401(k) plan $1 10,000 Student loans 50,500 Cash value of life insurance 52 6,000 Coin collection 10,000 Total long-term liabilities $275,500 Total invested assets $41,000 Personal use assets Net worth $73,950 House (appraised 7/01/19)* JT $275,000 Auto (Toyota) JT 22,500 Auto (Audi) JT 47,000 Total personal use assets $344,500 Total assets $393,000 Total liabilities and net worth $393,000 Note to financial statements Assets are stated at fair market value. 'Liabilities are stated at principal only and are all joint obligations except the student loans which belong to Michael. 'The money market account is currently serving as their emergency fund. `Land value was determined to be $50,000 and the home value $225,000. Replacement value of the home is also $225,000. Title designations IT = Joint tenancy with right of survivorship $1 = Michael's separate property 52 = Michelle's separate property The Williamses primarily use cash, check, and debit cards for personal expenditures