Case Study

Your clients, George and Jane Jetson, have come to you for assistance with their financial plan.They provide you with the following information:

George (age 44)

Earns $104,000 annually working at Spacely Sprockets

Contributes $1,625 to his 401(k) each month

Employer matches 100% of the first 3% and 50% of the next 2% of George's salary

Would like to retire at age 65

Social Security benefit estimate in today's dollars is $2,050/month at age 67

Jane (age 44)

Earns $31,000 working part-time from home as a graphic artist

Contributes $7,750 per year to a Simplified Employee Pension (SEP) plan

Would like to retire at the same time as George

Social Security benefit estimate in today's dollars in $1,725/month at age 67

Family

Children: Judy (age 9) and Elroy (age 5)

Judy has a 529 Plan with a balance of $23,500

Elroy has a 529 Plan with a balance of $12,000

$1,800 is being contributed to each child's 529 plan at the end of each year.

Expectations

George and Jane would like to have $125,000/year (in today's dollars) at retirement

Neither George or Jane expect their earnings to change before retirement

Both Judy and Elroy will go to Galaxy University

oCurrently, one year of tuition is $13,200 and they expect to pay for 5 years of school per child

oThe Jetsons believe the cost of tuition will increase at a rate of 6% per year until the time both children graduate

The Jetson's expect inflation to average 3% per year during their lifetime

George and Jane each expect to live to age 95

They expect their invested money to average a 9% per year return during their lifetime

Additional Information about the Jetsons

Current net worth is $1,072,000

Liabilities

oHome mortgage: $325,000 (12 years left at $1,800/month)

oAuto loan: $17,000 (2 years left at $730/month)

oCredit Card: $8,400 (paying $450/month)

Cumulative living expenses (food, utilities, fuel, clothing, etc.): $1,700/month

Effective income tax rate is 18%

Assets

Home value is $575,000

George's 401(k) balance is $625,000

Jane's SEP balance is $95,000

Investment account balance is $45,000

Bank CD balance is $75,000 (at 1.5% interest)and is maturing in nine months.

Checking account balance is $7,400

_ _ _

Based upon the information provided, answer each of the following questions in its own paragraph.Use a narrative format as if you are having a conversation with the Jetsons.Supporting calculations can be referenced in an Appendix to the case study.

1.Calculate the cost of Judy's education at Galaxy University.

2.Calculate the cost of Elroy's education at Galaxy University.

3.George and Jane want to make their last contribution to each child's 529 plan at the time Judy starts college.Based upon the current 529 plan balances and monthly contributions, will they achieve this goal?Using calculations, show and explain your answer to the couple.

4.Using the Annuity Method and only retirement account assets, will their current retirement account assets and contributions meet their retirement needs?Using calculations, show and explain your answer to the couple.

5.Using the Capital Preservation Method, calculate how much capital the couple needs to retire at their goal ages using only retirement account assets.

6.Using the Purchasing Power Preservation Method, calculate how much capital the couple needs to retire at their goal ages using only retirement account assets.

7.Explain the advantages and disadvantages of each of the three methods of retirement needs analysis and why the calculated amounts are different.

8.If the couple is not on track to meet their financial goals (individual or collective), what are three alternative ideas to help them meet their goals?Using calculations, show and explain each alternative to the couple.

9.Calculate the following ratios for the Jetsons and comment on what each one represents and how each relates to their financial goals:

Emergency Fund Ratio

Debt to Total Assets

(Question 9 continued)

Net Worth to Total Assets

Savings Rate (combined)