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FSHS 760C Project Worth: 40 points including project message board participation Julia & Steve Smith Julia and Steve Smith have come to you for some retirement planning advice. They have provided the following information to you. Julia, age 48, is a corporate communications manager for a small rural corporation. She earns $48,000 a year. The corporation offers a 401(k) plan for their employees. Employees can contribute up to 8% of salary and the employer will match each employee contribution 50 cents on the dollar. Employees may contribute up to the legal maximum in the 401(k), but the employer will not match beyond the first 8% of salary. Julia contributes 5% of her salary. She is fully vested. She has accumulated $50,000 in the plan (this includes her contribution as well as the employer contribution). Occasionally, Julia puts money into a traditional IRA. She has $18,000 in a traditional IRA earning 2.5% at her local bank. Steve, age 51, is a farmer. He uses the cash method of accounting. Last year his net farm income was $27,000. The average net farm income over the last three years he has farmed has been $25,000. Steve has one employee, Joe, age 63, who works part-time during the busy months on the farm. Steve paid Joe $8,000 last year. Steve inherited the farm from his grandparents three years ago. There are no mortgage payments. He does have $2,000 monthly payments on his farm equipment. The house Julia and Steve live in is on this farm; there is no mortgage on the house, but they do have a home equity loan with an outstanding balance of $48,000. Steve has $80,000 in a self-directed IRA with his local broker (invested in growth mutual funds). This money came from rolling over his vested retirement funds from his previous employer. The IRA is earning 4.5% per year. During the three years since Steve started farming he has saved nothing toward retirement, but he is interested in starting some sort of retirement plan. If need be, he does not mind if his employee is covered by the plan, but that is not of primary concern to him. His primary objective is to accumulate sufficient funds for his retirement. Julia and Steve have three children, ages 17, 15, and 13. Each has approximately $60,000 in UGMA accounts they received from their grandparents to cover their college expenses. They are invested in growth mutual funds with the Smith's stockbroker. The parents have told their children that they will provide no additional support for college. Any additional support for college expenses will have to be provided by the children. The members of the Smith family are currently covered by health insurance through Julia's employer. Julia has $50,000 in term life insurance provided as an employee benefit. Steve has $200,000 in universal life insurance. The policy has a current cash value of $12,000 and the annual premium is $1,200. Neither Julia nor Steve has any disability or long-term care insurance. Julia and Steve expect to inherit approximately $250,000 in about 10 years. The farm has been in Steve's family for seven generations. None of his children plan to farm, but Julia and Steve do not want to sell the farm even when they retire. They expect to stay on the farm as long as they are able. After Steve retires, they plan to rent out the farm acreage and should earn $15,000 to $20,000 per year renting the acreage. They estimate they can sell the farm equipment when they retire and net $25,000 after paying off any existing loans on the equipment. They will leave the farm to relatives when they die. Julia plans to retire at age 65. She expects to die at age 90. Steve plans to retire at age 72; he expects to die at age 88. They estimate they will need $55,000 per year in retirement (in today's dollars). They are not relying on Social Security except for the Medicare portion to provide their health insurance. They expect inflation to be 2% per year and they think they can earn 5% on their investments. Julia and Steve have not been particularly good savers in the past; they have minimal amounts in savings. However, they realize that time is of the essence if they will ever be able to retire. Assignment Advise the Smiths. Can they retire when they plan? If so, how? If not, can their goals be adjusted or their current behavior modified to meet a realistic retirement objective? Can you advise them on where they might be able to find more money to invest for retirement from their current budget? Advise them, but remember you are only making recommendations. How much do they need to accumulate to be able to retire? How much should they save per month (be sure to include inflation in your calculations)? In what types of retirement plans would you recommend that they save; explain why? Look at other aspects of their financial plan; is anything missing that we have covered in the earlier certificate courses that you think is critical? I am not looking for any particular format, but the text document answering the questions listed above may not exceed five pages, and fewer pages may be appropriate. You may attach a page of endnotes or of documentation, but the paper itself may not exceed five pages. This is going to require some effort; use bullets, concise explanations, etc. Look at the Smiths as if they were clients; answer their questions remembering that they are just normal people (so don't rely on technical jargon). Julia & Steve Smith Balance Sheet June 30, 2017 ASSETS Monetary Assets Joint checking account Joint money market account Total Monetary Assets Tangible Assets Farm (Steve) House (joint) Personal property (joint) Automobiles (joint) Farm equipment (Steve) Total Tangible Assets Investment Assets Stock portfolio (Steve, investment club) 401(k) (Julia) IRA (Julia) IRA (Steve) Total Investment Assets Other Assets Life insurance cash value (Steve) Total Other Assets TOTAL ASSETS $ 2,000 12,000 $ 14,000 700,000 100,000 60,000 20,000 270,000 $1,150,000 22,000 50,000 18,000 80,000 $ 170,000 12,000 LIABILITIES Short-Term Liabilities Credit card debt (13%) (joint) $ 5,000 Total Short-Term Liabilities Long-Term Liabilities Home equity loan (90 pmts left, 5%)(joint) 48,000 Auto loan (22 pmts left, 8%)(joint) 8,000 Farm equipment (204 pmts, 6%)(Steve) 255,000 Total Long-Term Liabilities TOTAL LIABILITIES $ 12,000 $1,346,000 $ 5,000 $ 316,000 $ 321,000 NET WORTH $1,025,000 TOTAL LIABILITIES & NET WORTH $1,346,000 Julia & Steve Smith Income & Expense Statement July 1, 2016-June 30, 2017 INCOME Wages (after withholding) Farm income (after expenses) Interest Dividends Total Income $ 28,800 27,000 180 750 EXPENSES Home equity loan ($637/mo) $ 7,644 Food 4,800 Meals eaten out 1,200 Utilities 2,400 Gasoline 1,200 Auto payments ($400/mo) 4,800 Credit cards 5,000 Life insurance 1,200 Homeowners insurance 1,000 Auto insurance 2,400 Telephone 600 Cell phones 600 Entertainment 6,000 School related expenses 1,800 Clothing 2,400 Gifts 4,000 Investments (investment club) 600 Miscellaneous 1,200 Other* 7,886 Total Expenses $56,730 $56,730 *The Smiths have determined that they could use up to this amount toward retirement, as long as the farm does as well as this year. Information from Schedule F, Form 1040 Income: Line 4: $86,413 from sales of grains Expenses: Line 12: Car and truck expenses: $900 Line 13: Chemicals: $2,000 Line 16: Depreciation: $5,333 Line 19: Fertilizers: $6,000 Line 20: Freight and trucking: $800 Line 21: Gasoline, fuel, & oil: $1,200 Line 22: Insurance (other than health): $500 Line 23b: Other interest: $15,204 Line 24: Labor hired: $8,000 Line 26a: Vehicles, machinery, & equipment rent: $600 Line 27: Repairs and maintenance: $412 Line 28: Seeds: $12,000 Line 29: Storage and warehousing: $3,079 Line 30: Supplies: $900 Line 31: Taxes: $1,610 Line 32: Utilities: $875 Line 35: Total Expenses: $59,413 Line 36: Net farm profit: $27,000