7: Based on Mike's savings goals which retirement plan would you recommend and why, be specific?

CHAPTER 15 MIKE AND MARIA ROMAN CASE MIKE AND MARIA ROMAN Mike and Maria have come to you, a financial planner, for help in developing a plan to accomplish their financial goals. From your initial meeting together, you have gathered the following information. PERSONAL BACKGROUND AND INFORMATION COLLECTED The Family Mike and Maria Roman live in the country and operate a baseball academy on their property. They have a quaint home with a baseball field to the left of their house and two covered baseball batting and pitching cages. Mike played professional baseball for 15 years and now provides baseball instruction through RBI to children ages six to the early twenties. Mike currently coaches several college baseball players and is one of the most respected hitting and pitching coaches in the area. He also coaches a 9-year-old team and a14-year-old team, both competing at the major division level. Maria has the tireless job of scheduling all of the lessons. Mike and Maria Roman Mike is 44 years old and loves his job. He is also an avid hunter and fisherman. Maria is also 44 years old and has done a wonderful job of raising their two kids, while helping with the family business. The Children emily is 20 years old and is a Junior at Florida State University where she is double majoring in anthropology and communications. She has always been an excellent student and has a full academic scholarship. She also works part time to earn additional spending money. Her brother, Michael, is 17 years old and is a junior at Mission High School, where he plays shortstop on the baseball team and is hitting over 300 for the year. 845 Mike and Maria RomanCASE ASSUMPTIONS 15 Required return - use the required return as stated in the case. For retirement and other long-term goals, assume cash and cash equivalents are added to investment accounts for purposes of projections and asset allocation decisions. Assume the education portfolio is not available to fund retirement. Assume Social Security benefits begin at age 67. GLOSS 85 sumptionsFinancial Statements 15 Statement of Income and Expenses Statement of Income and Expenses Mike and Maria Roman Statement of Income and Expenses for 2019 and CASH INFLOWS Expected (Approximate) For 2020 Salaries RBI Gross Revenue Totals Total Cash Inflows $245,000 CASH OUTFLOWS $245,000 Taxes Federal Estimated Tax Payments Property Tax Principal Residence & Land $40,000 $10,000 Debt Payments $50,000 Principal Residence Auto Loan - Jeep $22,547 $3,488 Auto Loan - Ram 600.09 $7,968 Credit Card Payments $13,000 Total Debt Payments $47,002 Living Expenses Utilities Principal Residence $3,900 Gasoline for Autos $3,500 Gifts $1,000 Entertainment $1,750 Vacations $2,000 Church Donations $500 Clothing $2,000 Auto Maintenance $2,000 Satellite TV $2,000 Food $4,650 $23,300 Total Living Expenses RBI Expenses Fees Paid to the Three RBI Coaches $60,000 $2,500 Utilities for Batting Cages $7,000 Baseball Field Maintenance $1,000 Baseball Equipment $3,000 Other Baseball Business Expenses $73,500 Total RBI Expenses Insurance Payments $6,000 MLB Health Insurance Premium $3,000 HO Insurance Principal Residence $3,300 Auto Insurance Premiums $2,472 $14,772 Life Insurance Premiums (Policy A & B) Total Insurance Payments $208,574 $36,426 Total Cash Outflows NET DISCRETIONARY CASH FLOWS 849 Internal InformationStatement of Financial Position 1/1/2020 Statement of Financial Position Mike and Maria Roman Balance Sheet as of 1/1/2020 Liabilities and Net Worth Assets Liabilities Cash and Cash Equivalents Home Mortgage3 $307,808 $5,000 $2,000 Cash Credit Card Balance Visa $25,000 Savings Account $1,200 $30,000 Total Cash and Cash Equivalents Auto Loan - Mike5 $26,444 Investment Assets $70,000 Auto Loan - Maria $9,918 Brokerage Account6 Total Liabilities Municipal Bond Portfolio8 $20,000 $347,370 Education Portfolio $10,000 IRA $20,000 $120,000 Total Net Worth $335,630 Total Investment Assets Personal Use Assets Personal Residence $200,000 Land for Home & Baseball $200,000 Field Jeep - Maria $18,000 Ram Truck - Mike $35,000 Furniture & Personal Property $80,000 Total Personal Use Assets $533,000 Total Assets $683,000 Total Liabilities & Net Worth $683,000 1. Assets are stated at fair market value. 2. Liabilities are stated at principal only as of January 1, 2020 (prior to January payments). 3. The home and land were financed with a $350,000 loan, seven years ago at 5 percent over 360 months. 4. They typically spend about $1,000 per month on each credit card, but the balances are higher after the holidays. They do not maintain these balances. 5. The Ram truck was financed with a loan of $30,000, six months ago at 3 percent over 48 months. 6. Mike's brokerage account is highly correlated to the market. In fact the account has a correlation with the market of about 99 percent. However, because Mike has some leveraged mutual funds in the account, the beta of the portfolio is approximately 20 percent greater than the market. Mike's brokerage account is a margin account, which has an initial margin of 50 percent and a maintenance margin of 35 percent. 7. The Jeep was financed with a loan of $13,000, 12 months ago at 3.5 percent over 48 months. 8. The municipal bond portfolio has a modified duration of 5 and a current YTM of 7 percent. 850 Chapter 15: Item Sets and the Mike & Maria Roman (3 employees Roman's Baseball Institute (RBI) mike started RBI seven years ago after he left professional baseball. He has built his reputation, as well that of RBI over that time period. RBI is one of the premier baseball academies in the area. The primary source of income for RBI is fees from baseball lessons. Lessons are priced at $70 per hour Mike has three other coaches who help him provide lessons (Mickey, Mr. Joe, and Joey). His dad, who is now retired from the Post Office, taught him how to play baseball, coached him growing up, and works with him now that he is retired. Mr. Joe also coached Mike as a child and now coaches for Mike. jog Is 20 years old, played baseball for Mike growing up and played in college during his freshman year before getting injured. RBI generates $245,000 in gross annual revenue and has the following expenses: Coaching fees to his coaches $60,000 Utilities $2,500 Field Maintenance $7,000 Equipment (balls, etc.) $1,000 Other Expenses $3,000 Mike works 1,500 hours and the other coaches total 2,000 hours. His three coaches work the following number of hours and are paid $30 per hour: Mickey 1,100 DAR JA 7021 Joey 500 Mr. Joe 400 Mike's coaches have worked with him for at least five years. Mike's net income equals the fees less the return. expenses listed above. He reports his revenue and expenses on Schedule C of his personal income tax Personal and Financial Objectives for Mike and Maria Roman 1. Provide for retirement. They would like to retire when Mike is age 60. They want to plan on $100,000 of retirement income in today's dollars. They expect to receive Social Security and Mike has a pension with Major League Baseball (MLB). They would like to plan on funding potential retirement expenditures until they turn age 95 and would like to maintain the same level of spending, even if Mike or Maria died early. 2. Provide for the cost of Michael's college education. They expect Michael to receive a partial college. baseball scholarship, but they plan on paying $15,000 per year for each of his five years to 3. Establish a retirement plan for the income he earns at RBI. EXTERNAL INFORMATION Economic Information Inflation is expected to be 3.0% annually. There is no state income tax. The yield curve is slightly upward sloping, but relatively flat. 846 Chapter 15: Item Sets and the Mike & Maria Roman Casehistoric and expected correlation between the equity markets in the modernized countries is They have a required rate of return of 9 percent. relatively high. The correlation between these markets increase especially during economic crisis. 15 The economy is in a steady slow growth expansion phase with moderate unemployment. Bank Lending Rates 15-year mortgage rate is 5.0%. 30-year mortgage rate is 6.0%. Secured personal loan rate is 10.0%. Education Information Mike and Maria believe strongly in education. They want Michael to attend a college for learning, as well as baseball. As mentioned, they expect to fund $15,000 per year for five years in today's dollars for Michael's education. Tuition has been increasing at a 7 percent rate, which is expected to continue indefinitely. NTERNAL INFORMATION Insurance Information Life Insurance Policy A Policy B Insured Mike Maria Face Amount $150,000 $40,000 Type Term Term Cash Value $0 $0 Monthly Premium $156 $50 Who pays premium Mike Mike Beneficiary Maria Mike Policy Owner Mike Maria Settlement options clause selected None None Health Insurance Mike and Maria are covered under the Major League Baseball policy. The plan includes a family deductible of $12,600 at a cost of $500 per month. Long-Term Disability Insurance . Neither Mike nor Maria are covered by any disability insurance. Homeowners Insurance The Romans have a HO3 policy with endorsements for replacement value and open perils for personal property. The current dwelling coverage is 100% replacement value with an inflation rider. tion 847en Automobile Insurance Both of their cars are covered. PAP Type $100,000/$300,000 Bodily Injury $50,000 Property Damage $5,000 per person Medical Payments Actual Cash Value Physical Damage $100,000/$300,000 Uninsured Motorist Bodily Injury $50,000 Uninsured Motorist Property Damage $1,000 Comprehensive Deductible Collision Deductible $1,000 Premium (annual) $3,300 Personal Liability Insurance . Neither Mike nor Maria have PLUP coverage. Income Tax Information The Romans filing status for their federal income tax return is married filing jointly. Retirement Information Mike would like to retire at age 60 and quit working. Mike met the requirements for the MLB minimum pension of $34,000 per year, which is what he expects to receive. This pension begins at age 62 and the amount is fixed for life (both his and his spouse's life). It is not inflation adjusted from today or during retirement. Mike expects his Social Security benefits will equal $30,000 in today's dollars at full retirement age, which is age 67. Maria does not have 40 quarters of Social Security coverage. Gifts, Estates, Trusts, and Will Information Neither Mike nor Maria have prepared a will or any other estate planning documents. Mickey Roman Mickey is Mike's dad and is an "old school" baseball coach. He turned 70 on December 22, 2018. He hasa pension payment from the USPS of $2,000 per month and he and his wife receives a monthly payment from Social Security of $2,200. He also has an IRA with a balance of $85,000 as of December 31, 2019 Since his wife will continue to receive Social Security and his pension in the event he dies, he has name his grandson Michael as the beneficiary of his IRA. Mickey also has Exxon stock that was distributed from a qualified plan 30 years ago. The distribution we a lump-sum distribution in which the FMV of the stock from the plan was $100,000. Mickey depositedin stock in his brokerage account and included $20,000 in his taxable income in the year of the distribu te based on the Form 1099-R. Mickey still owns the stock, which is now worth $324, same brokerage account. He is hoping to leave it to Mike when he dies. $324, 340 and is held in the 8 848 Chapter 15: Item Sets