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Q. Cash Flow, Debt, & Housing Project

Client DataJoy and Marco Maxwell

You just completed a data gathering with your new clients, Mr. and Mrs. Marco Maxwell. From your conversation and the documents they brought with them, you gathered lots of financial data and learned a bit about their goals. Marco is 66 years old and this is his second marriage. His first wife was killed in an auto accident 20 years ago, and his has two sons from that marriage. Marco, Jr. (age 35) lives with his long-time girlfriend, Angie, and Jeff (age 33) is married to Lucia. Jeff and Lucia have a daughter (Mary, age 7) and a son (Joe, age 3). Mary has been diagnosed with autism, but she is on the high-functioning end of the autism spectrum.

Joy is 64 years old, and this is her first marriage. Marco and Joy recently celebrated their 16th wedding anniversary. Two years after they were married Marco and Joy adopted sisters who are now a freshman and a junior in high school. Jessica (age 14) and Kaeley (age 16) are both very bright.

Marco and Joy live in Lexington, KY where Marco has worked as a professor at University of Kentucky for many years. He really enjoys his work and is not certain when he wants to retire...perhaps 5 to 10 years from now. After juggling her job and the children for many years, Joy retired about 3 years ago from her accounting career. She is very happy now to have more time with their daughters and with the grandchildren who live in Louisville, KY.

Marco has a base salary of $175,000 per year from his position as a tenured professor. In addition, he has held a chaired professorship for the last 10 years which increases his annual gross income by $30,000, and he plans on holding that professorship until he is age 70. Marco is covered by the University 403(b) retirement plan which has a required employee contribution of 6.6% of salary; the State of Kentucky also contributes 6.8% of salary to Marco's 403(b). The contributions are tax-deferred for federal income tax purposes, but the employee contribution is taxable for Social Security (SS) tax purposes. He currently has a balance of $654,223 in this 403(b) account which is invested in a diversified portfolio.

In addition to payroll withholding for his required retirement plan, Marco has the following deductions from his paycheck each month:

Federal income tax$3,225 Social security tax6.2% of earned income up to maximum annual earnings of $117,000 in 2014 plus 1.45% of all earned income

Health insurance coverage for Joy, Jessica, Kaeley, and himself$514

Disability income insurance coverage$108

Term life insurance coverage$62

Although Joy retired 3 years ago, she just started claiming Social Security (SS) in February of this year, when Marco turned age 66. Her monthly SS retirement benefit is $1,804. Marco is able to claim a spousal SS benefit of $1,100/month based on Joy's work record. They received their first SS benefits the end of March. When he turns 70, Marco will claim SS based on his own work record rather than Joy's, which will increase his monthly benefit.

When Joy retired, she rolled her company 401(k) plan into an IRA that has a current balance of $1,245,963. Over the years both Joy and Marco have tried to invest in Roth IRAs, and they have a joint taxable investment account. The balances in these accounts and other miscellaneous accounts are currently:

Marco's Roth IRA$44,399 Joy' Roth IRA$67,412

Joint taxable investment account--$36,409

Joint emergency fund (money market account)--$23,112 Joy's money market account (an inheritance from Joy's mother)--$38,333

Joint checking account--$4,898

Three months ago, Joy's favorite aunt passed away and Joy received a life insurance payment of $100, 000. That windfall (plus the positive cash flow created by the Social Security benefits) are what prompted Marco and Joy to call you to get assistance with their financial planning. Joy wants to use this $100,000 to pay for Jessica and Kaeley's college education, but both she and Marco feel they need help in deciding how to do that and in planning for their other financial goals. Joy has parked this money in a separate money market account until the college funding decision is made.

Marco has a coin collection inherited from his father valued at $17, 000. Joy owns a modest amount of jewelry which cost a total of $22,000, and was recently appraised for property insurance purposes at a replacement value of $26,750, but which she believes would only bring $13,500 if she had to sell it today. The only life insurance the family has is a term life policy with a face value of $400,000 through University of Kentucky, with premiums paid through payroll withholding (mentioned previously).

They own their home, currently assessed for property taxes at $325, 000, and aggregate property taxes run 2.2% of taxable value annually. Their original mortgage, taken out exactly 10 years ago, was for $240, 000 financed for 30 years at 5.1%. Their monthly mortgage payment for principle and interest is ________, and their current mortgage balance is $195,807. The annual cost of their homeowner's insurance is $1,920. They estimate that their home furnishings and other personal belongings have a current market value of ~$75,000.

Marco drives a 2020 Ram pickup truck with a blue book value of $22,000 (fully paid for), while Joy just bought a 2022 Lexus GS 350 last month that cost her $46,234. She was miserable when she - at the urging of her husband - checked her new car's blue book value and saw that her car's value had depreciated by $5,000 in the short time she had the vehicle. Her auto loan is for $40,000, financed for 4 years at 3.2% through her credit union. Her monthly payment is $______, and they will make her first payment on that loan at the end of this month. Marco also owns a 2019 Honda Gold Wing motorcycle, which he thinks is worth $5,500. He bought it two years ago for $8,480, financed it for five years at 7.5%. He still owes $5,462 on the bike, and his payments are $170/month. Vehicle insurance for both cars is $1,499 annually, and motorcycle coverage costs $989 annually. In addition they have a $2 million umbrella liability policy that costs $266 annually. Of course they are just waiting for their auto insurance bill to skyrocket once Kaeley gets her driver's license, but Kaeley is not in a hurry to drive...so that may not happen for at least a couple years.

The Maxwell typically spend $1,600 a month for food, $675 monthly for miscellaneous expenses for the girls (sports uniforms, club dues, allowances, etc.), $500 a month on entertainment, and $6,000 annually for clothing. Auto maintenance typically costs them about $1,100 a year, and they average $300/month in gas. Total utilities (electricity, gas, and water) average $840 per month. In addition, their monthly phone bill is $275 and the Suddenlink bill (for cable TV and Internet) is $130/month. They spend approximately $8,000 annually on gifts and $10,000/year on family vacations. Their out-of-pocket health expenses average about $3,400 annually. In order to encourage Kaeley and Jessica to save for their college educations, each of the girls have a money market account at the credit union where they deposit some of their earnings from babysitting and other jobs, cash gifts, etc. Joy and Marco also contribute $50/month to each of the girls' accounts. The balances in Kaeley and Jessica's accounts are now $5,245 and $4,022, respectively.

The Maxwells use their MasterCard and Visa Card to make most of their purchases; however, they pay off the total balance as billed. At the moment, their balances are $3,673 on the MasterCard that Joy carries and $2,399 on the Visa that Marco carries.

Goals

In visiting with Joy and Marco, they have shared with you the following financial goals

Get a better picture of their current financial position

Make sound financial decisions regarding the debt they are carryingshould they refinance their current home, should they prepay any debt, etc.

They plan on moving to Louisville and purchasing a home there when Marco retires. But they would like to know if they should go ahead and purchase that house now while interest rates are still low. Joy is lobbying for this because it would give her a nice place to stay when visiting the grandchildren, but Marco doesn't know if they can afford to maintain two homes.

Provide a good college education for Kaeley and Jessica...and hopefully be in position to also help fund the grandchildren's college educations.

Have a comfortable retirement and not be a burden on their children.