LOUDON CASE PERSONAL INFORMATION AND BACKGROUND Dennis and Sarah Loudon have been married for 8 years and have one child who is 5 years old. Dennis has one child by a previous marriage. The Loudons own a three-bedroom home, 2 cars, a motorboat, and a dog. Dennis operates a restaurant with his two brothers, and Sarah works as a credit analyst for a bank. The Loudons are all in good health. Dennis Loudon Dennis Loudon is age 38 and is a partner in a restaurant called The Blue Elf. Dennis and his two brothers operate the restaurant, and Dennis is the youngest of the three brothers. One brother is two years older, and the other brother is four years older. In addition to the three brothers, the restaurant has four full-time and five part-time employees. The full-time employees have been with The Blue Elf for two to four years and range in ages from 23 to 37. Each of the part-time employees works less than 1,000 hours annually. Two of the part-time workers are 60 years of age, and the others are under 21. Dennis and his brothers devote full-time to the restaurant. Sarah Loudon Sarah Loudon is age 35 and has been employed by Nations Bank as a credit analyst for 9 years. She has an MBA in finance from the state university. Tracy Loudon Tracy Loudon is age 5 and attends the local public elementary school where she is in kindergarten. She goes to the daycare center for the afternoons. Thomas Loudon Thomas Loudon is age 10 and lives with his mother Frances, Denniss first wife. Thomas attend public elementary school and goes to an after-school program. PERSONAL AND FINANCIAL GOALS The Loudons have the following financial goals, in order of priority: 1. Send Tracy and Thomas to private colleges away from home. 2. Minimize their current income taxes. 3. Save for retirement to provide a standard of living that is 75% of their preretirement earnings. 4. Save for a vacation home. 5. Develop an estate plan to minimize estate taxes. Appendix- Loudon Case ECONOMIC INFORMATION 1. The Loudons expect that inflation will average 3% per year. 2. The Loudons expect Dennis income from The Blue Elf to increase 4% annually. 3. The Loudons expect Sarahs salary to increase 5% annually. 4. Current mortgage rates are 6.5% for 15 years and 7% for 30 years. Lenders are requiring three points for mortgage loans. INSURANCE INFORMATION Life Insurance Policy #1 Policy #2 Insured Dennis Sarah Face amount $100,000 $100,000 Type Whole life Group term Cash Value $15,400 0 Annual premium $2,000 Employer-paid Beneficiary Sarah Dennis Contingent beneficiary Tracy Tracy Owner Dennis Sarah Settlement options Life income None Medical Expense Insurance The Loudon family is covered under a group major medical plan through Sarahs employer. The annual family deductible is $500, and above the deductible, the plan pays 80% of covered medical expenses. The cap on out-of-pocket medical expenses per illness or injury is $2,000, including the deductible. Disability Insurance Dennis has a personal disability income policy that will pay $2,000 per month after a 30-day elimination period. This policy has an own occupation definition of disability. The policy has a benefit period to age 65. The annual premium is $700. Sarah has a disability income policy arranged for by her employer. The definition of disability is own occupation, and the policy will pay 50% of her gross pay after a 90-day elimination period. The annual premium is $450, and the employer pays one-half and Sarah pays one-half. Homeowners Insurance The Loudons have a homeowners HO-3 policy providing $150,000 of coverage on the dwelling. The personal liability coverage has a $100,000 limit, and medical payments coverage has a $1,000 limit per person. The premium is included in their monthly mortgage payment. Automobile Insurance Both of the Loudons cars are insured under a personal auto policy (PAP) with bodily injury liability limits of $100,000/$300,000 and a $50,000 limit for property damage liability. The medical payments coverage is $5,000 per person per accident. Uninsured motorists coverage is in the amount of $50,000 per accident. The deductible on their collision coverage is $250, and the deductible on the other-than-collision coverage is $250. Their annual premium is $1,100. INVESTMENT INFORMATION The Loudons describe themselves as having a moderate level of risk tolerance in investments. Their expected and required rate of return is 9%. They expect to become more conservative as they approach retirement age. INCOME TAX INFORMATION The Loudons are currently in the 25% income tax bracket for federal income tax purposes. The state income tax is 2%. RETIREMENT INFORMATION The Loudons plan to retire in 27 years when Dennis is age 65. They would like to have a standard of living that is equal to 75% of their preretirement income. At the time they retire, the Loudons plan on selling their interest in the restaurant and moving to Florida or Texas. They expect that they will live in retirement for 25 years. The Loudons expect to receive Social Security benefits at the time they retire. Dennis expects to receive $13,000 per year in full retirement benefits at age 67. Sarah expects to receive the same amount. Dennis has an IRA through the credit union where he does his banking. Dennis has contributed $2,000 each year to the IRA for the past ten years. The returns on the account have declined from 10% to 6% over the past ten years. Sarah has a 401(k) plan through the bank where she works. The bank contributes $0.50 for every $1 contributed by Sarah, up to 6% of her salary. Sarah can contribute a maximum of 10% of her salary. She has been contributing 6% for the past six years. The annual return on the 401(k) investments has averaged 9% over the past six years. Sarah has named Dennis as the beneficiary. GIFTS, ESTATES, TRUSTS, AND WILL INFORMATION The Loudons have simple wills leaving their estates to each other. Dennis and Sarah Loudon Statement of Cash Flows January 1- December 31, 20XX Annual Inflows Dennis net income from the restaurant (Partnership income) $ 58,000 Sarahs salary 54,000 Dividend income 880 Savings interest income 275 Certificate of deposit interest income 300 Total inflows 113,455 Annual Outflows Mortgage (PITI) $14,700 Utilities and phone 2,450 Food 3,800 Clothing 3,400 Car payments 9,600 Car maintenance, gas and oil 2,875 Boat maintenance, gas, and oil 2,150 Entertainment 4,000 Vacation 3,200 Child care- Tracy 3,600 Life insurance 2,000 Health and dental 2,400 Disability insurance 925 Car insurance 1,400 Federal income tax 25,250 State income taxes 2,200 Social Security and Medicare taxes 1,300 Charitable contributions 2,000 401(k) contributions 3,240 IRA contributions 2,000 Frances Loudon 7,200 Total Outflows 111,390 Discretionary Funds 2,065 DENNIS AND SARAH LOUDON Personal Balance Sheet December 31, 20XX Assets Cash/Cash Equivalents JT Checking account $4,320 H Money market fund 5,200 JT Savings account 9,170 Total Cash/Cash Equivalents $18,690 Invested Assets H Certificate of deposit $5,000 JT Growth stock mutual funds 15,600 H Stock 8,800 H IRA (Dennis) 21,800 W 401(k) (Sarah) 35,160 H Partnership in restaurant 160,000 H Life insurance cash value 15,400 Total Investments $261,760 Personal-Use Assets JT House (land is $25,000) $160,000 JT Volvo 27,000 JT Explorer 35,000 H Boat 12,000 W Jewelry 9,000 Total Personal-Use Assets $243,000 Total Assets $523,450 Liabilities Current Liabilities JT Credit card balances $4,200 JT Car Loans 40,000 Total Current Labilities $44,200 Long-Term Liabilities JT Mortgage (9% for 30 years) $111,500 JT Business loan* 33,333 Total Long-Term Liabilities $144,833 Total Liabilities $189,033 Net Worth $334,417 Total Liabilities $523,450 H= Husband W= Wife JT= Joint tenancy INFORATMION ON ASSETS AND LIABILITIES Personal Residence The Loudons has purchased their home with a 30-year mortgage at a 9% rate of interest. The house is a 3-bedroom ranch and has a burglar alarm. Stock Dennis received 100 shares of EXXON stock as a gift from his father. His father bought the stock in 1996 for $50 per share and gave the stock to Dennis in 1998 when the shares sold for $60 per share. Dennis has reinvested his dividends in additional shares of EXXON stock. The total amount of reinvested dividends is $1,000. No dividends were reinvested this year. The stock currently sells for $72 per share (as of the date of the balance sheet). The Blue Elf Dennis and his brothers bought the restaurant 10 years ago. The restaurant has a fair market value of $480,000. The building and property have been appraised at $300,000. The restaurant is expected to increase in value at the rate of 4% per year. The Loudons have cosigned a note with Dennis brothers for a loan taken out three years ago to improve the restaurant. The balance on the note is $33,333. Frances Loudon Dennis pays his first wife Frances $600 per month for child support. This payment will drop to $200 per month when their child Thomas reaches age 18. Thomas is now 10 years old. Thomas attends an after-school program for which his mother pays $700 per school year. EDUCATION INFORMATION The Loudons would like to start college funds for Thomas and Tracy. The current cost of the private colleges where they expect to send their children is $25,000 per year, including tuition, room, board, and books. They expect that the children will begin college at age 18 and will attend for four years. The Loudons expect that the rate of inflation in the costs for private colleges will be 7%. Answer the following question: Results of the Analysis Capital needs analysis (You must show your work) What assumptions were used in the analysis? - Overview of retirement status for clients. This includes everything on the syllabus. - Wage Replacement Ratio - Lump-Sum needs at retirement - Proposed savings - Current versus propose portfolio allocation Discussion o Determine if their current savings rate is consistent with their desired goal. If not, what needs to change and how? In other words, how much money do they need on the first day of their retirement and are they saving enough to reach that goal. o Examine their expected retirement lifestyle and estimated their life expectancies. Do they have realistic goals? What other factors should they consider? o Considering that, they have decided to retire at a specific age. How might this affect their social security benefits? o Sarahs aunt retired in 2008 and converted her entire investment portfolio into cash. Hence, Sarah is concerned about receiving a low rate of return early in retirement. Discuss how receiving a low rate of return early retirement might hurt their retirement. What can be done to mitigate this risk?