Part 1 2022 income 2023 income (est) Paul (28) bookkeeper $35,000 $49,000 Annie (27) teacher $36,000 $37,000 Melanni (18 mo.) baby Paul and Annie have been married 3 years with one child, Melanni 18 months old. Paul is a bookkeeper with a small manufacturing enterprise in Lincoln and he is studying to become a CPA. Annie is a 3rd grade teacher in Lincoln Public Schools. Their daughter, Melanni, has had respiratory difficulties since birth. The babys problems are under control but require special care and monitoring. Because Paul and Annie had selected family coverage with Annies employer sponsored health insurance, most of the babys medical and hospitalization costs were covered. Annie pays $150 per month, withheld from her paycheck, to cover their share of the health insurance premium. Fortunately, Annies school offers daycare for Melanni from mid-August through mid-June for $370 per month. Both Paul and Annie had good credit scores (FICO 770 and 790 respectively) until the baby came but they had gotten temporarily behind on some payments. Both now score only 580 but it is improving. They have been re-building their emergency fund by saving $300/month in a Money Market account earning 1.2% and it has now grown to $4230. It had been nearly $7000 but they dipped into it to help pay for their three-week vacation to Yellowstone Park last June. They also have $10,000 in a CD at Union Bank earning 2.75% APY and maturing 10/31/2024 Between their state and federal income tax, they are withholding $900/month even though last years taxes were only $5410 federal and $2095 state. They used their 2021 tax refund to partially help pay for their Yellowstone vacation. They have no remaining revolving debt except for $3110 on their VISA card (19% APR) that will be paid off by the end of 2023. Their only installment debt is the $8,880 (6% APR) remaining on Annies 2019 Camry that will be paid off in two more years. Paul still drives the 2006 Bronco he acquired while in college. It is paid for but it is getting more expensive to maintain ($1000/yr.) as it ages and it only gets 15 mpg. They bought a home 2 years ago for $125,000 and have $97,060 remaining on a 5% 30-year fixed-rate mortgage with monthly payments of $537. The property taxes are an additional $2520 annually. They still owe Annies parents (Mr. & Mrs. Gloucester) $17,550 on the $25,000 borrowed to make the down payment. They are repaying $391/mo at 4% and will have them paid off in 4 more years.

Paul has recently received an attractive job offer but it is in Omaha. It would include a substantial salary increase from $35,000 to $49,000. If he takes the new job, Paul is debating whether to commute to Omaha (600 miles/week) or to move there. If they move, Annie would not be able to keep her teaching job in Lincoln but feels she could find a comparable job in the Omaha area. Paul just started contributing minimally to his employer-sponsored 401k (5% of salary pre-tax) in order to capture a $1 for $1 employer match on the first 5% contributed. He puts all of it into the Guaranteed Interest Account which does not fluctuate in value and pays interest at a rate that is 1% higher than the 52 week Treasury Bill rate (now at 3.25%). Pauls new prospective employer in Omaha has no employer sponsored retirement plan, so Paul has been contemplating making contributions to an IRA. He appreciates the tax advantages of the pre-tax contributions to a Traditional IRA but he also likes the idea of contributing to an after-tax Roth IRA, as long as they remain in a 12% federal tax bracket or less. Most of the familys voluntary retirement savings are directed to Annies pre-tax 403b because they have determined that those investment choices (all mutual funds) are better. She pays 10% of her salary into her retirement plan. After attending a seminar with the schools retirement plan expert, Annie has decided to allocate 50% to the Vanguard Target Retirement 2060 Fund, 25% into the Total Stock Market Index fund, 15% into the Inflation Protected Bond fund and 10% into the International Emerging Markets Stock fund. Paul is generally more cautious than Annie and he feels that the funds she has chosen are too aggressive since over 80% is going into equities. After all, this is their retirement security she is gambling with! Part 1 Financial Statements & Spending (10 points) Based on their financial statements, what items of expenditure do you believe they should be able to cut back in order to better manage their cashflow? What two assets are likely to be the biggest components of their net worth by the year 2035? Currently, what is their total PITI? Savings & Debt (10 points) What is a prudent dollar amount for them to keep in savings for an unexpected emergency? Given their current level of savings and debt, is there a more prudent way for them to manage their cash flow? Give possible financial complications that could affect the decision whether to buy a home in Omaha? What is the financial downside if Paul takes the new job but they continue to reside in Lincoln while he commutes? If they move, what are implications for Melannis healthcare? Taxes (10 points) What are some of the items Paul and Annie could deduct by using Schedule A if they are considering Itemized Deductions on their federal taxes? If the Standard Deduction for a married couple filing jointly is $25,100 in 2022, is it wiser to itemize their deductions or to take the Standard Deduction? How does having a child under 18 affect their taxes? Why would Pauls decision whether to contribute to a pre-tax Traditional IRA or an after-tax Roth IRA be based on his federal marginal tax bracket?

Investments (10 points) Why does Annies employer offer mutual funds for the retirement plan investment choices? If the investment choices in Annies retirement plan are better, why put anything into Pauls plan? List some of the aspects that you think Paul and Annie considered before concluding that Annies retirement plan had the best investment choices? Does it really matter which types of investment they hold inside a tax-sheltered retirement plan and which types they keep in their outside savings? Asset Allocation(10 points) Why would Annies retirement plan offer so many different choices of funds? Why would Annie want to use more than one fund for her retirement account? How risky do you feel Annies current overall asset allocation is? Are Pauls concerns about the riskiness of Annies choices justified? How does the number of years until retirement affect the asset allocation decision?