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Personal Finance Case Study

You focuses on providing clients with comprehensive financial planning and meeting the fiduciary standard. Mr. and Ms. Garca heard about your services from a neighbor, who stated that you are great at helping families evaluate various options so they can develop a plan that will help them reach their goals and make intelligent financial choices along the way.

When you first met with the Garcas, you learned the facts described below and were provided with both the attached balance sheet and budget. Use this information to help the Garcia family improve their financial condition and reach their financial goals.

PERSONAL INFORMATION:

Javier and Sofia Garca live in Roanoke, VA in a home Javier inherited from his parents. They have two daughters: Ariana (age 8) and Isabela (age 10); both attend the neighborhood elementary school. Javier (age 35) earned an Associates degree in building trades from Virginia Western and currently works as a welding supervisor for a commercial construction company. Sofia (age 32) received a B.S. in Commerce from University of Virginia and now runs a small online retail business out of their home which has proven to be very successful.

Sofias mother, Isadora, is living in Floyd County, but she may be unable to live on her own much longer. Sofia needs your help in assessing whether her mother should move in to their Roanoke home or seek residence at an assisted living facility. Isadora has requested that Javier and Sofia try to help her find a local facility where she could live with people her own age, maintain her independence but have the support she may need. She is not opposed to moving in with the Garcas in their Roanoke home but doesnt want to bring a burden to the family. She can help fund the cost of care through the sale of her home and current Social Security income, but needs help finding some quotes for different levels of care.

OBJECTIVES/GOALS (in priority):

1. Restructure and reduce debt to the greatest extent possible.

2. College funding for both Ariana and Isabela (tuition and living expenses).

3. Reallocate investments to meet both their goals and attitudes.

4. Recommend any end of life documents they need to have.

5. Retire at Javier and Sofias age 67 with 80% pre-retirement income.

MONEY ATTITUDES

Additionally, Javier and Sofia provided us with their answers to the money personality questionnaire. From the questionnaire it was determined that Javier was the spender of the family and enjoyed buying new and sometimes expensive things while Sofia was much more frugal about purchases. In the section about risk tolerance, Javier stated that he previously had a small brokerage account and that he enjoyed playing the market. Sofia was much more nervous about the financial markets and shared her worries about the risk of investing in the stock market and abroad. Jointly they agreed with a moderate level of risk tolerance.

DEBT INFORMATION:

While Javier inherited their home, they did take-out a $95,000 mortgage when Ariana was born to pay-off Sofias remaining school loans and to make some home improvements. They remember the interest rate (3.8%) and monthly payment ($565.72), but dont know the current balance.

The family is also carrying combined credit card balances of $12,000. They are making a monthly payment of $500, but recognize that the 16.9% annual interest rate is adversely affecting them. They are considering accelerating paying off their debt.

Javier and Sofia own two automobiles: a 2016 Ram 1500 Quad Cab and a 2011 Dodge Grand Caravan. The latter they bought just after Ariana was born and has been paid off for a couple years, but with over 120,000 miles it needs to be replaced. They dont mind pulling some money from savings, but dont want to incur more than a $450 monthly payment on a new van.

Other debt and asset information can be found in the balance sheet.

EDUCATION INFORMATION:

The Garcas primary financial objective is to pay for a good portion of their childrens college expenses, but they dont know where to begin. They have saved $16,000 in a Roth IRA in Sofias name that they would not mind using to partially fund the goal. They know that they have made contributions of $10,000 as she has put in $1,000 per year since Isabelas birth.

INSURANCE INFORMATION:

Health

Insured Persons are Javier and Sofia Garca and all dependent children

Major Medical Limit is unlimited

Co-Insurance is 80/20

Deductible is $750 per person per year with a maximum of $1,500 per year

Stop-Loss is 20% of the first $8,000 per person per year with a maximum of $3,000 per year

Life

Sofia has a $300,000 whole life insurance policy; Sofias mother is the beneficiary.

Javier has a group life insurance policy equal to two times his gross salary; Sofia is listed as the beneficiary on his life insurance policy.

Homeowners

Standard HO-3 Policy

$280,000 coverage on dwelling

$140,000 replacement cost coverage on contents

$150,000 liability coverage

Annual Premium is $800

Auto

No-Fault (Two Vehicles)

Split Limits: 50/100/25

Collision Deductible is $500

Comprehensive (other-than-collision) Deductible is $500

Annual Premium is $2,000

Disability

Sofia has no disability insurance coverage

Javier has any occupation long-term disability insurance through his employer. This policy has a short, 90-day elimination period, and provides 70% salary replacement.

ASSET INFORMATION:

The couple has a joint brokerage account that really hasnt been set aside for a specific purpose. It has a current balance of $41,250 and isnt preforming very well as it is invested almost entirely in cash equivalent investments and a Treasury bill mutual fund. On the other hand their retirement accounts have done very well as they are totally invested in U.S. stocks at Javiers urging.

INVESTMENT ASSUMPTIONS:

Listed below are assumptions of future expected returns and standard deviations (a standard measure of risk or how far a return will deviate from its expected average). This table is given to help you provide high-level guidance over how the Garcas might consider reallocating or diversifying their retirement assets based on their risk tolerances. Additionally, they want to plan on a 2% inflation rate.

Region

Asset Class

Average Annual Return

Standard Deviation

Domestic (U.S.)

Stocks

Large-Cap Stocks

8.9%

19.5%

Mid-Cap Stocks

11.4%

21.2%

Small-Cap Stocks

11.6%

25.0%

Bonds

Corporate Inv Grade Bonds

3.4%

7.0%

Corporate Hi-Yield Bonds

7.4%

11.3%

Treasuries

3.0%

2.2%

Commodities

4.5%

17.8%

Real Estate

8.9%

17.8%

Cash (Money Market Funds)

1.0%

1.6%

International

Developed Markets Stocks

10.0%

20.6%

Emerging Markets Stocks

14.3%

29.6%

Corporate Bonds

3.0%

11.2%

Source data: Morningstar

RETIREMENT INFORMATION:

Javier and Sofia would like to retire at age 67. They would like to ensure they have enough money in their retirement accounts to allow them the equivalent of 65% of their preretirement income on top of what they expect from Social Security they want to assume that Social Security will only cover about 15% of pre-retirement salary. They are assuming they will be retired for a total of 30 years.

Javiers employer is currently matching one half of all employee contributions up to 6% of his salary in his 401(k). They are unsure if they are meeting the employer match provided by Javiers 401(k). They also want to know how much they could/should save in Sofias SIMPLE IRA.

ESTATE PLANNING INFORMATION:

The Garcas would like you to instruct them on any estate documents they will need to prepare for any life-ending related decisions and to ensure their assets go to protect their children after their passing.

To Begin The Process

Once a planner gets to know their client and has agreed to work together, the next step in the planning process is to analyze the clients current situation. To that end, fill-in the missing information in their income statement and balance sheet to determine their available discretionary cash flow (unallocated income) and their net worth (how much their assets are worth after deducting any liabilities).

The Garca family has provided you with a current balance sheet and an estimated budget of their living expenses for the year 2019. These statements will show you the Garca familys current financial situation and how the Garcas manage their personal finances. Using the information on the balance sheet as well as in the case, you will need to calculate some of the inputs that they didnt know or have available.

The Outcome

At a minimum your written plan should address the following goals:

The main strengths and weaknesses of the Garca familys current financial condition.

Your recommendations for improving upon their current financial situation.

Discuss the resolution of any conflicts between the clients goals and needs, and the ability to satisfy them due to financial or other constraints.

Identify the extent to which you would advise them to use other professionals to implement any recommendations.