Question
Mike and Donna Jones recently got married and moved to your area. They are both 30 years old. Neither one of them has ever done
Mike and Donna Jones recently got married and moved to your area. They are both 30 years old. Neither one of them has ever done any financial planning on their own, but they know they need to begin to look at the big picture. Mike just finished his residency in internal medicine and has been offered a job at Memorial Hospital as a staff doctor. He will be employed by the hospital directly at a beginning salary of $250,000. He has $275,000 of student loans with a monthly payment of $1500. They recently purchased a new home and signed a 30-year mortgage for $350,000 with a monthly payment of $2000. Donna does not plan on working outside the home at this point. They are already trying to have children and are hoping to have at least two in the near future. Memorial Hospital offers a Defined Contribution Pension in which they contribute 6% of Dr. Jones income. He can also take advantage of a voluntary 403(b) plan sponsored by the hospital. Both retirement plans begin after one year of employment. He will begin working next week. Memorial Hospital offers a Consumer Directed Health Plan to its employees. They have a group term life insurance policy that automatically covers Dr. Jones for 2 times his annual salary, subject to the normal eligibility requirements of group plans. He has the option of purchasing additional group term life insurance of up to 5 times his salary. The Hospital provides doctors with a group long-term disability plan that will provide up to 40% of salary if he is totally disabled. Donna has no life insurance. They have done a budget and will need $7000/month after taxes for essential needs (this includes the mortgage and student loans) and an additional $3000/month after taxes for discretionary needs. They file their taxes as a married couple filing jointly. They have come to you to seek advice on how to get started moving in the right financial direction. Assume the rate of inflation equals the discount rate.
- They first ask you about his Long-Term Disability Insurance coverage:
- Why might you recommend that Mike purchase individual long-term disability?
- What sort of definition of disability would you recommend he choose and WHY?
- How much coverage should he buy and WHY?
- Mike asks you whether he should purchase the additional life insurance protection offered through the hospital or whether he should do something else.
- What are the benefits of purchasing the additional group insurance instead of purchasing an individual policy?
- How much total life insurance would you recommend that Mike have on his life if he wants Donna to be able to cover essential needs for at least 20 years?
- Assuming he buys the maximum group term coverage ($1,250,000) and has additional need beyond that, what type of life insurance would you recommend and WHY?
- Donna asks you about life insurance for her.
- Do you recommend that she purchase any life insurance on her? If so, WHY?
- What type of coverage would you recommend for her and WHY?
- They are eager to begin saving money and have agreed that they can save 10% of his gross income ($25,000) pretty easily starting immediately.
- Can Mike and Donna both open a Traditional IRA this year?
- Can they deduct their contributions from their taxes? If so, will that change next year if Mike decides to contribute to the 403(b) plan?
- Can either he or Donna open a Roth IRA? Why or Why not?
- Assuming they contribute the maximum amount to IRAs for both of them ($6000x2), what would you recommend they do with the additional savings of $13,000 per year to avoid paying taxes each year on the growth?
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