Abstract

This case presents a married couple in their early thirties, who have many of the typical financial goals of persons in their life situation. The case information and following structured question items focus on several basic topics in the fundamentals of financial planning. Structured question items appear at the end of the case, organized by topic area.

Introduction

You are a professional financial planner, and you have been engaged by Gerald and Etienne Idowu to assist them in formulating and meeting their financial goals. Although the scope of your engagement is potentially comprehensive, for now you have been asked to focus on planning goals and subject areas that typically are considered fundamentals. Assume today is January 2, 2020.

Gerald Idowu

Gerald is a 32 year-old mechanical engineer and works for a large, multinational aerospace firm. He has worked at the same firm for eight years, and he earns $8,000 gross salary per month. Gerald is in very good health.

Etienne Idowu

Etienne is a 32-year-old nurse. She works two days per week at a local physicians office. Because she is part-time, she does not qualify for any benefits from her job, but she earns $800 gross wage per week. Etienne is in very good health.

The Idowus have been married for 14 years. Gerald and Etienne. Etienne worked full time while Gerald attended engineering school. After Gerald finished school, Etienne earned her nursing degree. They have been unable to conceive children. The Idowus spend heavily, and often have little cash left at the end of the month.

The Idowus live in a common law state.

Both Gerald and Etienne grew up in poverty, with their parents making extreme sacrifices to send Gerald and Etienne to school.

Stated Financial Planning Goals (in no particular order)

2. Reduce debt.

3. Establish a program of investing toward retirement.

Economic Information and Assumptions

Mortgage interest rates: 30-year = 4.8%; 15-year = 4.2%; closing costs = 2% of loan principal.

Expected long-term average returns to S&P 500 = 8.5%.

Current Treasury interest rates: 90-day = 2.2%; 1-year = 2.8%; 10-year = 3.15%; 30-year = 3.65%.

Inflation (Consumer Price Index) is expected to average 3.0% long term.

Balance Sheet (January 1, 2019) Assets		Liabilities and Net Worth
FMV		Balance
Checking, Bank #1	$2,500	Credit Card Balance	$15,000
Savings, Bank #2 $5,000
		Car #1 Note $30,000
RoyCo Stock	$1,200	Car #2 Note	$12,000
SupremeCo Stock	$1,700
Gerald 401-k $22,000
Gerald Roth IRA	$6,500	Home Mortgage Loan	$277,000
Etienne Roth IRA $6,500
		Total Liabilities $334,000
Personal Residence $355,000
Car #1 $32,000
Car #2 $11,000
Total Assets	$443,400	Net Worth	$109,400

Information about Liabilities

The credit card has interest rate APR = 16.99%. The note secured by Car #1 has an interest rate APR = 4.00%; the Car #2 note has interest rate APR = 2.99%.

Cash Flow Statement (year ended December 31, 2018, and expected for 2019) Inflows
Gerald Salary	$96,000
Etienne Salary	$40,000
Interest Income	$200
Payroll Taxes Withheld	($9,486)
Income Tax Withheld	($10,600)
Net Cash Inflows	$116,114
Outflows
Home Payment (PITI)	$37,500
Car Note Payments	$16,800
Credit Card Payment	$5,400
Car Expenses	$4,600
Utilities	$7,100
Groceries	$3,400
Clothing	$4,500
Payments to Parents	$24,000
Entertainment	$4,800
Miscellaneous	$4,200
Total Cash Outflows	$112,300
Annual Surplus	$3,814

Insurance Information

The Idowus are covered under Geralds employer major medical plan, which pays full premium for employee and spouse. The plan is a major medical with annual deductibles = $500 individual/$800 family, 80/20 co-pay, and $5,000 stop loss including deductible.

The home is insured and premiums = $2,500 per year.

Geralds employer provides Gerald with group term life insurance equal to two times his annual salary; Etienne is beneficiary. The Idowus have no other life insurance. Geralds employer provides employees with 12 paid sick days per year, and employees with catastrophic conditions can draw up to 90 days of paid sick leave from a sick leave pool. The Idowus have no other disability insurance.

The Idowus carry full coverage on their automobiles. Their liability limits are 50/100/50, and their part D deductible = $200.

Investments Information

The Idowus have a long-term goal of investing toward retirement They tell you that they have moderate risk tolerance.

Schedule of Investments

	FMV	Basis	Beta	5- year Return	Date Acquired	Note(s)
RoyCo	$1,2000	$3,400	1.80		2010	NASDAQ technology company
SupremeCo	$1,700	$4,200	1.65		2010	NASDAQ biomedical company
Roth IRAs	$13,000		0		2010-2015	FDIC-insured CDs 5-year return 2.1%

Jake Savage

Nine years ago, Jake Savage, a financial advisor with GlamCoFinancial, provided financial planning services for the Idowus. In his position, Savage was licensed to sell securities and insurance products, and his compensation was a straight commission on product sales.

Savage obtained Geralds name from a university graduation list published in the newspaper, and indicated that he had worked for some of their classmates and also for a few well-known local residents, whose names he named. When visiting the Idowus, Savage convinced them that a variable annuity and the investments in RoyCo (basis = $3,400) and SupremeCo (basis = $4,200) stocks would meet their goals, which were assumed to be the typical goals of a young married couple. After the stock investments suffered quick losses, Savage was always unavailable when the Idowuscalled, and he never returned their calls. He ended up leaving the firm and the state. The annuity did not perform as illustrated, and the Idowus ended the annuity, paying a 15% surrender fee.

Tax Information

Real property taxes on the home = $7,500 per year. The Idowus file married filing jointly for Federal income tax, and there is no state income tax where they live.

Retirement Information

Gerald hopes to retire at age 67. The Idowus expect a retirement period of= 25 years.

Etienne is the beneficiary of Geralds 401-k. Geralds 401-k is invested in the stock of his employer; this is the only option for employees in the plan. The plan matches half of the employees contributions up to a maximum employer contribution = 4% of the employees salary.

The Idowus Roth IRA investments are both in certificates of deposit at an FDIC-insured bank. The current CDs mature in January 2022 and have an APR = 2.1%. Each IRA names the surviving spouse as death beneficiary.

Estates Information

Neither Gerald nor Etienne has a valid will, power of attorney or living will.

Questions:

Financial Planning Process

Which step(s) of the financial planning process did Jake Savage perform?

What immediate financial goals, in addition to their stated goals, would you suggest for the Idowus?

Financial Position and Statement Analysis

Name three financial weaknesses for the Idowus.

Name three financial strengths for the Idowus.

Compute and discuss the following financial ratios for the Idowus:

a. Emergency fund

b. Housing debt payment ratio

c. Total debt payment ratio

d. Savings rate

Time Value of Money

If Gerald were to begin a new IRS that is invested in the market, what will the IRA be worth at Geralds retirement age assuming Gerald begins making annual contributions of 6% of his net income and an average rate of return of 7%. There no additional contributions made to their current.

At their current saving rate, how much could they expect to have in retirement; with assuming they will both get about 30% of their current income from social security. Based on their current goals will the plan meet their retirement goals?