PLEASE ANSWER BOTH #4 AND #5! PLEASE ALSO SHOW WORK! THANK YOU

It is December of 2022. Kathy and her husband John live in Arkansas. They have never been serious about personal financial planning. However, they just turned 30 and are realizing how important it is. They are feeling overwhelmed. Their children are six (born in October) and four (born in May). John has been working part-time since their oldest kid was born to help lower costs of childcare. The oldest is now in 1^st grade and the youngest is in preschool; both go from 8 am until 3 pm. John works 25 hours a week at a wage of $22 dollars an hour and is paid once a week. Kathy earns a salary of $75,000 a year and is paid semi-monthly (2 paychecks a month). All four family members are currently on insurance benefits through Kathys job. She is withholding 14% of each paycheck for federal taxes and 5% for state income taxes. John is withholding 10% for federal and 5% for state.

Kathy is currently contributing $250 a paycheck to a 401k through her employer. Her employer matches 50% of her contributions, with a max annual match of 15% of salary. Kathys take-home pay per paycheck is $1,855.19 and Johns take-home pay per paycheck is $425.42.

Right now, they do intentionally have net cash at the end of each month, but they havent been consistent with what to do with it. They currently have an emergency fund saved up equal to four months of living that is stored in a high-yield savings account, which earns 3.2% annually and compounds monthly. They no longer save monthly for the emergency fund.

Currently, their only debt is Kathys student loans and their mortgage. For the student loans, they make the minimum payment of $400 a month and the loans will be paid off in 8 years. They make the minimum mortgage payment of $1,100 and have 23 years left on the mortgage. $985 of the mortgage payment goes towards principal and interest (what you would use in an amortization table) and $115 goes towards taxes and insurance.

They purchased a new car for Kathy 6 years ago, which is paid off. John would like a new vehicle too, so they occasionally save for that but do not have a time horizon on the purchase. They currently have $2,500 saved for Johns vehicle. They save different amounts each month for several different areas and all of their savings are in the high-yield savings account. The only retirement savings currently is through Kathys 401k, which has been earning an average of 10% for the 8 years she has been utilizing it. They do often spend their net cash on additional recreation or clothing.

Homeowners insurance is part of the mortgage payment. They currently have HO-1 coverage with replacement cost of 80% for the dwelling and no additional features. Their health insurance is through Kathys work. It is basic coverage for herself, John, and their two children. Through this coverage she does have six months of short-term disability for herself and John and 2 years of long-term disability for the both of them. She currently does not have dental or vision, choosing to pay out of pocket thus far. The only other insurance they have is for their cars, with basic coverage of 50/100/50 and no supplementals.

Part 1.

In order to make a solid and successful financial plan, we need to know what we want at different time horizons. One of the most important, and longest horizon, goals is saving for retirement. Kathy and John both plan to work another 35 years and retire at 65 years old. Kathys 401k is a Lifecycle plan, which means that it shifts towards lower-risk assets as she approaches 65 years old. It is expected to earn 10% until she is 50 years old, when it will shift to earn 8% until she is 60 years old. It will then shift again to return 5% until she is 65 years old and will retire.

Kathy and John do not want to worry about running out of money, so they plan to live until they are 100 years old (35 years of retirement). They want to be able to withdraw todays value of $8,333 a month for an annual income of $100,000 a year during retirement. They also understand inflation, and they want $100,000 worth in todays dollars. They recognize they need to save more for retirement, so they plan to open a Roth IRA and maximize it by making monthly contributions of $541.67 (the annual maximum amount is $6,500 per account). They decide to go into a fund that expects to earn 11% and they plan to move that into a lower risk 6% plan when they turn 50 years old. When they retire they will move the 401k savings into a low-risk fund that earns 3.5% and the Roth IRA savings into a safe bond-fund that earns 3%. If they are still short on their goals, they will open a second Roth IRA and contribute only enough to meet their goals. The fund they would choose for this would be expected to earn 12% and they would shift this at age 55 into a fund earning 5% for safety and not make any more contributions. At retirement, it would be shifted into a bond-fund that would return 3%.

Questions

1. They currently have no life insurance. Is that acceptable? If it is not, how much coverage should they purchase? (Use an estimation method, not a random number). How would that impact their monthly expenses (Google averages for the appropriate level of coverage).

2. Should they change their homeowners insurance? Doing so will change their monthly mortgage expense. Consider the possible options and costs.

A. Increase replacement coverage

I. 90%: additional $17 a month

II. 100: additional $26 a month

B. Their current deductible is $500

I. Increase deductible to $1,000: less $16 a month

II. Increase deductible to $1,500: less $25 a month

III. Increase deductible to $2,000: less $34 a month

C. Upgrade to HO-2: additional $22 a month

D. Their home is in an area marked with Flood Zone C

I. Flood insurance: additional $38 a month

3. Should they change their car insurance coverage?

A. Each $50,000 increase in coverage for each of the 3 components increases monthly premium by $5

B. Add uninsured motorist: additional $11 a month

I. Also add underinsured motorist: additional $6 a month

C. Add comprehensive: additional $15 a month

D. Their current deductible is $500

I. Increase to $1,000: less $18 a month

II. Increase to $1,500: less $29 a month

4. Should they change their health insurance?

A. Add dental for all 4: additional $27 a month

B. Add vision for all 4: additional $30 a month

C. Their current deductible is $500

I. Increase deductible to $1,000: less $20 a month

II. Increase deductible to $1,500: Less $32 a month

III. Increase deductible to $2,000: Less $40 a month

5. Should they utilize a health savings account or a flexible spending account? If so, how much should they save? Consider tax implications and possibility of rollover.

6. Explain your choices to Kathy and John in a comprehensive and clear paragraph or two.