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FINC 250 Financial Literacy Signature Assignment Case Study Nigel and Elizabeth Buckingham Today is January 1, 2017. Nigel and Elizabeth Buckingham 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 Nigel Buckingham (Age 27) Nigel is an assistant in the marketing department for Energy Tech, Inc., a small company with 15 employees. His annual salary is $39,000. Elizabeth Buckingham (Age 24) Elizabeth is a legal research assistant with the law firm of Laurent, Heine & Merritt, LLC. Her annual salary is $30,000. The Children Nigel and Elizabeth have no children from this marriage. Nigel has two children, Wilfred, age 4, and Robert, age 3, from a former marriage. Wilfred and Robert live with their mother, Louise. The Buckinghams Nigel and Elizabeth have been married for two years. Nigel must pay $500 per month in child support until both Wilfred and Robert reach age 18. The divorce decree also required Nigel to create an insurance trust for the benefit of the children and contribute $175 per month to the trust. The trustee is Louise's father. There are no withdrawal powers on the part of the beneficiaries. The trust is to be used for the education and maintenance of the children in the event of Nigel's death. The trustee has the power to invade any trust principal for the beneficiaries at the earlier of the death of Nigel or Wilfred reaching age 18. Personal and Financial Objectives 1. They want to save for an emergency fund. 2. They want to eliminate debt 3. They want to save for a 20% down payment on their first home. The current value of the house is $150,000. Property taxes would be $1,800 annually, and the annual insurance premium would be $1,125. Both taxes and insurance are expected to increase with inflation. 4. They want to contribute to tax-advantaged savings. 5. They plan to have additional children in seven years. 6. They both plan to retire in 29 years. Economic Information Inflation is expected to be 4.0% annually. Their salaries should increase 5.0% annually. There is no state income tax. The after-tax investment rate of return is 6%. Bank lending rates are as follows: 6.0% for a 15-year mortgage, 6.5% for a 30-year mortgage, and 8% for a secured personal loan. Insurance Information Life Insurance Insured Face amount Type Cash value Annual premium Who pays premium Beneficiary Policy owner Settlement options clause selected 1 2 Policy A Nigel $250,000 Whole life $2,000 $2,100 Trustee Trust1 Trust None Policy B Nigel $117,0002 Group term $0 $267 Employer Louise Nigel None Policy C Elizabeth $30,000 Group term $0 $75 Employer Nigel Elizabeth None Wilfred and Robert are beneficiaries of the trust This was increased from $50,000 to $117,000 January 1, 2009 Group Term Life Insurance Section 79 Uniform Premium Schedule Under age 25 0.05 per month per $1,000 Age 25 to 29 0.06 per month per $1,000 Health Insurance Nigel and Elizabeth are covered under Nigel's employer plan, which is an indemnity plan with $200 deductible per person per year and an 80/20 major medical coinsurance clause with a family annual stop loss of $1,500. Long-Term Disability Insurance Nigel is covered by an own-occupation policy with premiums paid by his employer. The benefits equal 60% of his gross pay after an elimination period of 180 days. The policy covers both sickness and accidents and is guaranteed renewable. In the event of disability, the policy will pay benefits up to age 65. Elizabeth is not covered by disability insurance. Renters Insurance The Buckinghams have a HO-4 renters policy without endorsements. Content Coverage: $25,000; Liability $100,000. Automobile Insurance Both Car and Truck* Type Bodily injury Property damage Medical payments Uninsured motorist Comprehensive deductible Collision deductible Premium (annual) Personal Auto Policy $25,000/$50,000 $10,000 $5,000 per person $25,000/$50,000 $200 $500 $4,950 *The Buckinghams do not have any additional insurance on Elizabeth's motorcycle Investment Information The Buckinghams think that they need six months of cash flow net of all taxes, savings, vacation, and discretionary cash flow in an emergency fund. They are willing to include in the emergency fund the savings account and Nigel's 401(k) balance because it has borrowing provisions. The Federal Express stock was a gift to Nigel from his Uncle Sebastian. At the date of the gift (July 1, 1994), the fair market value of the stock was $3,500. Uncle Sebastian's tax basis was $2,500, and Uncle Sebastian paid gift tax of $1,400 on the gift. The TECHO stock of 100 shares was a gift to Elizabeth last Christmas from her Uncle Kyle. At the date of the gift (December 25, 2008), the fair market value was $8,000, and Uncle Kyle had paid $10,000 for the stock in 1996 (his tax basis). The growth mutual fund (currently valued at $13,900) had been acquired by Nigel over the years 2011-2016 with deposits of $1,000, $1,000, $2,000, $2,000, $2,500, and $3,000. The earnings were all reinvested and reported via Form 1099 each year: Year Reinvested Earnings 2011 $0 2012 $200 2013 $400 2014 $400 2015 $650 2016 $750 The growth mutual fund has a transfer-on-death provision. The account is in Nigel's name, and the beneficiary designation is Nigel's mother. This provision was made prior to his marriage to Elizabeth. Income Tax Information The filing status of the Buckinghams for federal income tax is married filing jointly. Both the children (Wilfred and Robert) are claimed as dependents on the Buckinghams' tax return as part of the divorce agreement. Their marginal tax rate is 22.65% (the federal marginal tax rate is 15%; FICA taxes are 7.65%). The Buckinghams live in a state that does not have state income tax. Retirement Information Nigel currently contributes 3% of his salary to his 401(k). The employer matches each $1 contributed with $0.50 up to a total employer contribution of 3% of his salary. Gifts, Estates, Trusts, and Will Information Nigel has a will leaving all of his probate estate to his children. Elizabeth does not have a will. The Buckinghams live in a common-law state that has adopted the Uniform Probate Code. STATEMENT OF CASH FLOWS Nigel and Elizabeth Buckingham January 1, 2016 to December 31, 2016 (Expected to be similar in 2017) CASH INFLOWS Salaries Nigel - salary Elizabeth - salary Investment income* Total inflows CASH OUTLOWS Savings - house down payment Reinvestment of investment income 401(k) contribution Total Savings FIXED OUTFLOWS Child Support Life insurance payment (to trustee) Rent Renters insurance Utilities Telephone (home) Telephones (cell) Auto payment principal and interest Auto insurance Gas, oil, maintenance Student loans Credit card debt Furniture payments Total fixed outflows VARIABLE OUTFLOWS Taxes - Nigel FICA Taxes - Elizabeth FICA Taxes - federal tax withheld Food $ $ $ $ 39,000 30,000 1,635 $ 70,635 $ 4,605 $ 45,242 1,800 1,635 1,170 6,000 2,100 9,900 720 1,080 540 900 5,400 4,950 3,600 3,600 4,500 1,952 2,984 2,295 7,393 4,800 Clothing Entertainment/vacation Total variable outflows Total cash outflows Discretionary cash flows (negative) 1,500 1,920 $ $ 20,892 70,739 $ (104) *$510 from dividends and $1,125 from other investment sources. ASSETS1 STATEMENT OF FINANCIAL POSITION Nigel and Elizabeth Buckingham January 1, 2017 LIABILITIES AND NET WORTH Cash and equivalents Cash Savings account Total cash and equivalents Invested assets Federal Express stock (100 shares)4 TECHO stock (100 shares) Growth mutual fund 401(k) account Total invested assets Use assets Auto - Elizabeth Truck - Nigel Motorcycle - Elizabeth Personal property and furniture Total use of assets Total assets $ $ $ $ $ $ $ 500 1,000 1,500 Liabilities2 Credit card 1 Credit card 2 Student loan - Nigel3 Auto loan - Elizabeth Furniture loan Total liabilities 5,000 7,200 13,900 1,500 Net worth 27,600 26,474 4,000 1,000 17,750 49,224 78,324 Total liabilities and net worth $ $ 8,000 1,862 45,061 21,179 2,300 78,402 $ (78) $ 78,324 Notes to Financial Statements 1 Assets are stated at fair market value. 2 Liabilities are stated at principal only as of January 1, 2017, before January payments 3 Nigel's parents took out the student loans, but he is repaying them. Nigel paid $2,732 in interest in 2016. 4 Federal Express's current dividend is $3.40 per share. Information Regarding Assets and Liabilities Home Furnishings The furniture was purchased with 20% down and 18% interest over 36 months. The monthly payment is $162.69. Automobile The automobile was purchased January 1, 2015, for $26,474 with 20% down and 80% financed over 60 months with payments of $450 per month. Stereo System The Buckinghams have a fabulous stereo system with a fair market value of $10,000. They asked and received permission to alter their apartment to build speakers into every room. The agreement with the landlord requires the Buckinghams to leave the speakers if they move because the speakers are permanently installed and affixed to the property. The replacement value of the installed speakers is $4,500, and the non-installed components are valued at $5,500. The cost of the system was $10,000, and it was purchased last year. QUESTIONS Please answer the following questions clearly showing the calculations wherever they are required. Do not just give the final number as the answer, where calculations are required. Show the workings. If you do not show the workings you will not receive full credit. 1. List the Buckinghams' financial strengths and weaknesses. (10 points) 2. After reading the case what additional information would you request from the Buckinghams to complete your data-gathering phase? (5 points) 3. Assume that Nigel is in a serious automobile accident during 2016 and is unable to perform the duties of his occupation for 208 consecutive days. What benefits will be receive under his longterm disability insurance policy? Assume 260 working days in a year. (5 points) 4. Assume that in 2017, Nigel is driving his car on a foggy night and the car collides with a deer in the road. As a result, Nigel incurs medical expenses of $1,000, and his friend, Bill, who is riding with him, incurs medical expenses of $2,000. The front bumper of the car also sustains damage of $1,500. If Nigel files a claim for these items under his personal auto policy (PAP), what amount will the policy pay? (5 points) 5. Calculate the following financial ratios for the Buckinghams (10 points) a. Liquid Assets / Debt Payments b. Net Worth / Total Assets c. Total Debt / Total Assets d. Annual Housing and Debt Payments / Annual Gross Income e. Annual Savings / Annual Gross Income 6. Calculate the original purchase price of the furniture that Nigel and Elizabeth own (Hint: Use time value of money calculations). (5 points) 7. Assuming that the Buckinghams are planning to buy their dream house seven years from now and expect house prices to increase at the same rate as the general economic inflation rate, how much will they have to save at the end of each month to make the down payment if they plan to earn the assumed after-tax investment rate of return? (Hint: Compute the future value of the house price at inflation rate to get how much they will have to put down as down payment) (10 points) 8. Nigel is trying to determine which is the better choice: the traditional IRA or the Roth IRA. Which do you recommend and why? (5 points) 9. In 2015, Elizabeth sustains injuries while playing with Wilfred and Robert. Medical expenses totaled $1,800 of which $1,600 were covered. The insurance company paid medical expenses in what amount? (Assume that the Buckinghams had no other 2015 medical claims prior to this claim.) (5 points) 10. If there was a fire in the Buckinghams' apartment building and their in-wall speaker system was destroyed, would they be covered under the HO-4 policy, and if so, to what extent? (5 points) 11. What does guaranteed renewable mean with regard to Nigel's disability policy? (5 points) 12. What is the approximate 2016 federal adjusted gross income (AGI) for the Buckinghams? (10 points)