Gordon and Colleen Howe Mini Case

Today is January 1, 2023

Gordon and Colleen Howe both 36 years old. Mr Howe recently accepted a job making $93K a year, Mrs. Howe is currently unemployed. They have one child who is 4 years old, an English Setter and Maine Coon Cat. Both are licensed lawyers and have been married for eight years

The Extended Family

Mr. Howe has a mother in her 60s who is living far away and is modestly self-sufficient. Mr. Howe has two siblings both married and self-sufficient. Mr Howe inherited $400K from his late Uncle Stan who was 100 years old when he died and had worked every day of his life. He has spent the inheritance down to $200K. Mrs Howe has one brother who is married, wealthy and has two children. Mrs Howes mother is a pharma distributor and lives in another state she is 60 and self-sufficient. Mrs Howes father lives in the same town as the Howes and her father is self-sufficient and healthy.

Mrs Howes Father (Trust 1)

Mrs Howes father set up a trust for the benefit of Mrs Howe. Her brother is trustee, but it is really controlled by the father. The trust distributes $30K/year to Mrs Howe. The basis is $700K and it has an average earnings rate of about 8.5% per year for the last 10 years. There is no plan to increase distributions.

Economic Info

Inflation averages 3% for last 20 years and expected to continue at 3%

Bank lending rates: 15 year 5.25%; 30 year 6.75%; Any closing costs associated with refinance are 3% and included in refinanced mortgage.

Expected rate of return 8.5%

Residence Current value $550K; Balance on 30-year mortgage at 5.5% $260,514; Land value $150K;

Monthly payment (P&I) $1703.37;

Owned home for 8 years; Will not qualify for refinance until Mr. Howe has been with his current employer for one year.

Life - No life insurance; Mr Howe expects $50K group term from new employer

Health Covered under Mr Howe employer plan; Cost $1K/month for family

Disability No disability; Mr Howe will be covered for LTD provided by employer at 65% of gross pay. Homeowner HO3 with open perils and replacement value; $250 deductible; Dwelling covered$300K with 80/20 coinsurance clause; Premium $2400/year. Auto - $250 deductible; 100/300/50; Premium $1800/year

Assets

JT Bank account $28K

JT Inherited portfolio $200K

C Brokerage account $127K

G401K $32K with brokerage account

JT Residence $550K

JT Auto 1 $40K

G Auto 2 $25K

JTHH Items $150K

JT Liabilities Mortgage $260514

Other Financial Annual Expenses

Annual contributions to 401K $17500

SS Taxes $7115

Federal WH $10384

State WH $3715

Property tax $3000

Tuition to preschool $15K

Utilities $2400

Entertainment $1200

Clothing $2000

Auto maint/gas $3000

Food $9600

Investments

Investment portfolio $327K

Brokerage account includes gifts from Mrs Howes father invested in money market account at 0% earnings

401K from Mr Howes prior job invested in index fund

Asset

Current $

Expected

Returns

Portfolio

Percentage

Cash

$28,000

0%

7%

T Bonds

$0

4%

Corp Bonds

$0

6%

International

Bonds

$0

7%

Index Fund

$159,000

9%

41%

Large Cap Fund

$200,000

10%

52%

Mid/Small Funds

0

12%

International Stock Fund

0

13%

Real Estate Funds

0

8%

Total

$387,000

8.5%

Residence

Current value $550K; Balance on 30 year mortgage at 5.5% $260,514; Land value $150K; Monthly payment (P&I) $1703.37; Owned home for 8 years; Not qualify for refi until Mr Howe in new job 1 year

Estate Info - No estate planning documents

Goals and Concerns

Want proper insurance, investment and estate portfolio

Want to know cost of college education for their child so they can approach Mrs Howes father about funding a 529 plan. Current cost of education $20K in todays dollars with expected 5% inflation. Expect the child to be in school six years and expect rate of return 8.5%

Want to plan for early retirement (100% WRR, excluding trust income) at age 62. Mr Howe to save $17500/yr in 401K with an employer match of $6K. Expect to live to age 90. Do not include SS benefits in planning.

Want to be debt free at retirement

Analysis Part A

1. Prepare personal financial statements (income statement, balance sheet)

2. Based on the information from Question 1, prepare pie charts for use in a presentation to the client.

3. Compare the available information to benchmarks and determine strengths and weaknesses. What recommendations would you make to improve their results against the benchmarks.

4. Calculate the following & comment on each (show calculations) and compare to benchmarks:

Emergency fund ratio

Savings Rate

Current Ratio assuming only Mortgage Liability

Housing 1

Housing 2

5. Education and Education Funding

Calculate the present value of education (college starts at the age of 18) using an investment rate of return of 8.5% assume 5 years of education 5% education inflation. Assume the annual payments will be made for 15 years.

a. FV of education Funds needed in todays dollars

b. PV of education costs Funds needed upon entering college

c. How much per year will the Howes need to save for their childs education, annual savings required.

6. Retirement Analysis

a. Calculate the future value of the Howes retirement needs at age 62, based on WRR.

b. Calculate the present value of the Howes retirement needs now at age 62, real dollars in todays dollars.

c. Calculate the Present Value of retirement funds needed at their current age.

d. Calculate the annual savings required to meet the Howes Retirement Goal

7. Review the information from questions 1 thru 4 and determine if the Howe family can meet the annual contribution and provide suggestions to the family.

Analysis Part B

8 - Prepare an analysis of the Howes risk management insurance coverage using the following format:

Metric

Actual

Recommended

Cost/Savings

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

9 Describe the estate planning documents the Howes need immediately and what are the important provisions of each? If you recommend powers, who is the power holder?

10- Perform analysis of the Howes portfolio taking into consideration risk tolerance and asset allocation. Assume they are aggressive investors (goal of 10% return) and revise asset allocation to achieve this goal. Assume risk tolerance appropriate for their age and years to retirement

11. Based on your analysis what are the strengths and weaknesses of the Howe family financial plan and overall financial condition. What recommendations would you make to them based on your analysis. What additional information would you need to do a complete analysis. SWOT type analysis

please answer it all