EXECUTIVE SUMMARY

FAMILY DESCRIPTION

Alan and Angel Young are both 36 years old. Mr. Young recently accepted a new job making $93,000 a year

and Mrs. Young is currently unemployed. The Youngs have one children (newborn), a dog, and a Maine Coon

cat. Angel is also highly educated in literature and law from prestigious universities. They are both licensed

lawyers. The Youngs have been married for eight years.

The Extended Family

Mr. Young has a mother in her 60s, who is living far away and is modestly self-sufficient. He also has two

siblings who are both married and self-sufficient. Alan inherited $400,000 from his late Uncle Fred, who was 100

years old when he died and had worked every day of his life. He has dwindled this inheritance down to

$200,000. Mrs. Young has one brother who is married to a wealthy entrepreneur and they have two children.

Angels mother is a pharmaceutical distributor and lives in another state. She is 60 years old and modestly self-

sufficient. Angels father lives in the same town as the Youngs and her brother. He is self-sufficient, healthy, and

has the utmost faith that the Youngs will become productive members of society.

Angels Father (Trust #1)

Angels father set up a trust for the benefit of Mrs. Young. Her brother is the trustee, but the trust is really

controlled by her father. The trust regularly distributes $30,000 per year to Angel and from time to time, invades

the corpus to buy her a new car or give her money for nonessentials. The balance in the trust is $700,000 and it

has an average earnings rate of about 8.5% per year for the last ten years. The trust balance is growing, but

there is no sign that distributions will increase.

GOALS & CONCERNS

1. They want to have a proper insurance, investment, and estates portfolio.

2. They want their taxes analyzed.

3. They want to know the cost of college education for the newborn, expected to go to college in 18 years, so

they can approach Angels father about fully funding 529 Plans college savings plan. The current cost of

education is $20,000 per year in todays dollars and the inflation rate is expected to be 7%, while general

inflation is 3%. They will fund 5 years of education, and while they dont know, they expect the 529 Plans

investment rate of return to be 10%.

4. They want to plan for an early retirement (100% wage replacement ratio, excluding the trust income) at age

62, as they want to spend the autumn of their lives together traveling and visiting friends and family. Alan plans

to save $18,000 per year in a 401(k) plan starting this year and to have an employer match of $6,000. They

expect to live to age 90.

5. As neither of the Youngs currently have 40 quarters of Social Security earnings and because they are

planning to retire at age 62, they do not want to include any Social Security retirement benefits in their planning.

6. They want to be debt free at retirement.

INTERNAL INFORMATION

THE RESIDENCE

The current value of the residence is $550,000. The balance of the 30-year mortgage at 5.5% is $260,514. The

land value is $150,000. The monthly payment is $1,703.37 and they have owned it for 8 years. They will not

qualify for refinancing until Mr. Young has been employed for 12 months.

INSURANCE INFORMATION

Life Insurance

Neither Alan nor Angel Young currently have any life insurance. Mr. Young expects to have $50,000 of group-

term life insurance from his employer.

Health Insurance

They will be covered under Mr. Youngs employers health plan, which is an excellent plan. However, the cost

will be $1,000 per month for the family. The lifetime benefit per person is unlimited.

Disability Insurance

Neither Alan nor Angel Young currently have disability insurance. Mr. Young will have a long-term, guaranteed

renewable disability policy, provided by his employer, as of tomorrow for 65 percent of his gross pay, covering

sickness and accidents with benefits to age 65.

Homeowners Insurance

The Youngs have an HO3 policy with endorsements for open perils and replacement value. They have a $250

deductible. The dwelling is covered for $300,000 and they have an 80/20 coinsurance clause. The premium is

$2,400 per year.

Auto Insurance

They have a personal automobile policy (PAP) covering both cars with a $250 deductible for comprehensive and

collision. They do not have uninsured motorist as they do not drive much, and both have safe vehicles. The

liability coverage is $100,000/$300,000/$50,000. The annual premium is $1,800 for the two cars.

INVESTMENT INFORMATION

The Investment Portfolio

The $200,000 investment portfolio produces variable income from -10% to +15%, depending on the year. It was

originally $400,000 but with poor investment returns and expenditures, it has been reduced to $200,000 at this

time. Last years income, which consisted mostly of dividends, was $8,000.

Other Investment Assets

The assets in the brokerage account are from gifts from Angels father. These assets are invested in a money

market account but are currently earning 0%. Mr. Youngs 401(k) assets, which are from when he worked at the

consulting firm, are invested in an equity index fund.

Risk Tolerance

Their portfolio consists of a few energy stocks that generated dividends and capital gains of approximately

seven percent. They recognize that they need to modify their asset allocation but are not sure what to do.

TAX INFORMATION

For the last few years they have been low income tax payers but are uncertain as to this year.

ESTATE INFORMATION

They have not prepared any estate planning documents.

Answer the following questions;

1.

Risk Management

Prepare an analysis of the Youngs current risk management situation and portfolio using appropriate metrics

(benchmarks) from the textbook.

Risk Product

Metric

Actual

Recommendations

Comments

Life Insurance

-

His

12

-

16 x Gross Pay

None

Needs $1.5M 30

year term due to

level of assets and

income

Cost $1,080

$.72 per $1000

2.

Debt Management and Short Term Obligations

Calculate the following;

a.

15 year mortgage refinance

b.

The Emergency Fund Ratio

c.

The current Ratio

d.

Housing Ratio 1

e.

Housing Ratio 2

3.

Education and Education Funding

Calculate the present value of education (college starts at the age of 18) using an investment rate of

return of 10% (same as 529 plan), assume 5 years of education 7% education inflation. Calculate the

following assuming the grandfather can contribute $70,000 to the 529 plan.

a.

FV of education

b.

PV of education costs

c.

Taking into consideration the grandfathers 529 investment how much per year will the Youngs

need to save for their childrens education.

4.

Retirement Analysis

a.

Calculate the present value of the Youngs retirement needs at age 62

b.

Calculate the present value of the Youngs retirement needs now at age 36, real dollars in

todays dollars.

5.

Based on your analysis what are the strengths and weaknesses of the Young family (financial) and what

recommendation would you make to them based on your analysis. What additional information would

you need to do a complete analysis.