Michael and Marie Allen Case Study Michael and Marie Allen have come to you, a financial planner, for help in developing a plan to accomplish their financial goals. They have great hope for their future; however, theyhaverecentlyrealizedthattheyarenotas financiallycomfortableas theywouldliketo be at this point in their lives. Assume today is January 1, 2015. Personal Background and Information Michael Allen (Age 45) Michael is a vice president of Asher Bank and Trust. He has been employed there for 12 years and has an annual salary of $70,000. Marie Allen (Age 40) Upuntil Samwasborn,Mariewas anarchitectwithalocaldesignfirm. She isuncertain when she will resume her career. The Allens Michael and Marie have been married for 12 years. They have two children, Max and Sam. Michael has a son, Alex, and a daughter, Abby, from a previous marriage. Michael's mother, Carol, lives with the Allens. Family Alex is 20 years old and is a junior at StateUniversity on a partial scholarship, 500 miles from Michael and Marie. When not boarding at school, he lives with his mother, Nicole. During the summers, Alex works at Asher Bank and Trust as an intern and lives with Michael and Marie.Nicole and Michael have agreed that Nicole may claim Alex as a dependent. 167 168 Case Study Abby,16yearsold,lives inanother statewithhermotherandattendspublic school. Shehas aspirations to study at The Juilliard School upon graduation and has applied for a scholarship. She is alsoNicole's dependent for income tax purposes. Max is 10 years old andattendsWoodridgeAcademy, a private school.He plays the trombone inthe school bandandattends bandcamp eachsummer. Max also plays onthe school's basketballteam. Samantha (Sam)is7yearsoldandis insecondgrade atWoodridgeAcademy.Shemeetswithaprivate tutor once aweek to get helpwith her reading skills. Sam plays recreational soccer atthe local playground. Carol, age 70, is Michael's mother. She had a heart attack two years ago, and has been living with the Allens sinceshe leftthehospital.Sheis aretiredsecretaryanduses theincome fromher investments to meet her living expenses. She did not qualify as a dependent ofthe Allens in 2014. Carol is concerned that her investments may not perform well in the future and Michael and Marie may have to give her financial support. Grant andRose, Marie's parents, are in good health and have agreed to pay for Max and Sam's tuition through the 8th grade. They are retired and travel year-round. Marie is their only child. Nicole, Michael's ex-wife,who lives inanother state, is anattorney for theDepartment ofJustice. There is currently no child support agreement for Abby. Personal and Financial Goals Help Alex pay for his college expenses. Assist Abby with tuition and expenses when she begins college in two years. Save for college tuition for Max and Sam. Evaluate investment and insurance risks and improve risk management. Pay off all debt by retirement. Retire at the age of 62 with 80% of preretirement salary at retirement. Prepare proper wills and an estate plan. Purchase a new car for Alex when he graduates from college in two years. Economic Information The Allens expect medical inflation to be 5% annually and the annual inflation rate to average3%overboththe short andlong terms.Thepresent average interest rateontheir credit cards is approximately 16%. The risk-free rate is 3.25%, and the Allens' required rate of return is 8%. Current mortgage rates are 6% for 30-year fixed mortgages and 5.5% for 15-year fixed mortgages.Closingcostswillapproximate3%ofanymortgagerefinancedandwillbepaid separately. Case Study 169 Insurance Information Health Insurance The entire family is insured under Michael's company plan, which is a major medical LifeInsurance plan with a $500 per person, $1,500 family maximum deductible, an 80/20 coinsurance clause, anda family annual stop-loss limitof $2,500.Michael's employerpays100%ofthe health insurance premium. Michaelhas agrouptermlife insurancepolicywithafaceamountof$60,000provided by his employer. Michael is not a highly compensated employee. The policy beneficiary is Marie.Thepremiumof $9permonthispaidbyhis employer.The Section79table costper $1,000 of protection is $0.15 for Michael's age. Disability Insurance Michaelhasaprivatedisabilityinsurancepolicycoveringaccidentaldisabilityforown occupationwitha30-dayeliminationperiod.IntheeventMichaelisdisabledbasedonthe provisionswithinthepolicy,thebenefitis$2,700permonthuntilMichael'snormal retirement age, defined as Michael's retirement age under the Social Security Act on the date of his disability. The annual premium is $761 and is entirely paid by Michael. Homeowners Insurance The Allens have a HO3 policy with dwelling extension and replacement cost oncontents. The policy features a $1,000 deductible and an annual premium of$950. Automobile Insurance The Allens have automobile liability and bodily injury coverage of $100,000/$300,000/$100,000. They have both comprehensive coverage (other than collision) and collision. The deductibles are $250 (comprehensive) and $500 (collision), respectively. The annual premium is $900. Investment Information The onlyinvestments theAllenshave outsideofthe retirementplanare theABCstock inherited by Marie from her grandmother in 2014 and the college fund certificates of deposit. Income Tax Information Michael and Marie tell you that they are in the 15% federal income tax bracket. They pay $820 annually in state and local income taxes. 170 Case Study Retirement Information Michael wants to retire at age 62 with income equal to 80% of his preretirement income. HeexpectstoreceiveSocialSecuritybenefitsof$24,000(intoday'sdollars)forhimselfand $12,000 for Marie (in today's dollars) at full retirement age 67. They will receive 70% of Michael's full benefit at age 62 but only 32.5% of Michael's full benefit for Marie at early retirement.IfMariereturnstowork,shemayearnahigherbenefitonherownworkrecord. The bank offers a Section 401(k) plan in which Michael is an active participant. The bank matches contributions dollar for dollar up to 3% of Michael's salary. Michael currently defers 3% of his salary. Michael's maximum contribution allowable under the plan is 16%. Education Information Max is 10 years old and currently attending fifth grade atWoodridgeAcademy,which he will attend through high school. Michael and Marie have $2,500 in CDs that they contribute to once a year ($500 each year)for Max. This account will be used for college and is in Max's name. Samantha (Sam)is 7 years old. She is insecond grade atWoodridgeAcademy andwill attend the academy through high school. Michael and Marie have $1,000 in CDs to which they contribute once a year ($500eachyear)for Sam.This accountwillbeusedfor college and is in Sam's name. Michael and Marie invested in CDs for Max and Sam's college educations; the CDs are ownedby Michael andMarie.The rateof returnonthis college fundis6%, and the current balance is $15,000. Michael and Marie would also like to be able to send their children to school for five years instead of the traditional four years. The extra year could be used to pursue a masters or graduate degree. The current cost of college (including room, board,tuition, and books)is $15,000 per yearper child.Theyexpecttheir childrentostart collegeattheageof18.TheAllens expect an educational CPI of 5%. Gifts, Estates, Trusts, and Will Information Michael's will leaves everything to Marie conditioned on a six-month survivorship clause, otherwise, equally in separate trusts for the four children. Marie does not have a will. Case Study 171 STATEMENT OF CASH FLOWS Michael and Marie Allen For the Year 2015 (Expected) INFLOWS Salary - Michael $ 70,000 Investment income Interest (taxable) $ 900 Dividends 150 Total investment income $ 1,050 TOTAL INFLOWS $ 71,050 OUTFLOWS Savings Reinvestment interest/dividends $ 1,050 Section 401(k) plan elective contribution 2,100 College fund CDs 1,000 Total savings $ 4,150 Ordinary living expenses Food $ 6,000 Clothing 3,600 Child care 600 Entertainment 1,814 Utilities 3,600 Auto maintenance 2,000 Church contributions 3,500 Total ordinary living expenses $ 21,114 Other payments Section 401(k) loan repayment $ 1,703 Credit card payments1 960 Mortgage payments2 21,954 Boat loan3 3,040 Total payments $ 27,657 Insurance premiums Automobile $ 900 Disability 761 Homeowners 950 Total insurance premiums $ 2,611 Tuition and education expenses $ 1,000 Taxes Federal FICA and withholding $ 12,855 State and city income tax 820 Property tax (principal residence) 1,000 Total Taxes $ 14,675 TOTAL OUTFLOWS $ 71,207 NET CASH FLOW (DEFICIT) $ (157) 1 Credit card payments: Principal $345; Interest $615 2 Mortgage payments: Principal $1,234; Interest $20,720 3 Boat loan payments: Principal $1,493; Interest $1,547 172 Case Study STATEMENT OF FINANCIAL POSITION Michael and Marie Allen January 1, 2015 ASSETS1 Liquid assets JT Checking account $ 1,500 JT Savings account 1,000 Total liquid assets $ 2,500 Investments W ABC stock2 $ 13,000 JT Certificates of deposit (college fund) 15,000 H Section 401(k) vested plan balance 43,000 Total investments $ 71,000 JT Personal real estate - residence6 $250,000 Other personal assets JT Automobiles $ 15,000 JT Boat 20,000 JT Jewelry 13,500 JT Furniture/household 60,000 Total other personal assets $108,500 TOTAL ASSETS $432,000 LIABILITIES3 AND NET WORTH Current liabilities JT Credit cards 4,000 Long-term liabilities H Section 401(k) plan loan4 $ 7,000 JT Mortgage on residence5 197,888 JT Boat loan 13,559 Total long-term liabilities $218,447 TOTAL LIABILITIES $222,447 ALLEN FAMILY NET WORTH $209,553 TOTAL LIABILITIES AND NET WORTH $432,000

What percentage of their total income are Michael and Marie Allen paying out in debt payments?