FIN4910: Financial Planning Case ; Booth and Needa Martini
Today, January 1, 2017, Booth and Needa Martini have come to you, a financial planner, for help in developing a plan to accomplish their financial goals. From your initial meeting together, you have gathered the following information:
- Personal Background and Information
Booth Martini
Age 60 employed 25 years as a Vice President for an oil field services company.
He participates in a 401k plan at work where the company matches $.25 on each
$1.00 Booth contributes up to 5% of his salary. Currently, Booth is putting the
5% in to get his employer’s match. His salary is currently $100,000 and he
generally gets a 3% raise each year (assume this continues).
Needa Martini
Age 48 owns Publications, Inc. and Needa’s Advertising, Inc. Needa takes
$40,000 in withdrawals combined, as a salary from the two businesses.
The combined fair market value of the businesses, though since she is the primary employee, should she decide to liquidate the businesses, it is assumed she would net $100,000.
Booth and Needa Martini
They met July 4, 1995 on a cruise, fell in love, and married November 23, 1995.
They have no children together.
Booth’s children from a previous marriage
Michael Age 34
James Age 32
Brian Age 30
Lucy Age 28
All are healthy, employed, married, and not living with Booth and Needa.
- Personal and Financial Goals
- Needa plans to sell her businesses.
- Booth planed to retire in 5 years, but would like to do it now (life expectancy is 25 years )
- They plan to sell their primary residence which is not paid off. (Could net $300,000)
- They plan to refinance their vacation home and have that be a temporary home base. Fair market value of vacation home is $150,000. Original mortgage at 9%, 15 years. Current mortgage balance is $120,000, remaining term is 120 months and the current payment is $1,522 per month (principal and interest).
- They would like to be able to travel extensively before deciding where to permanently relocate.
- Booth and Needa think they would need 2/3 of the current combined income in order to live the lifestyle they currently think they live. You need to determine if this is possible, and/or required.
III. Economic Information
- They expect inflation to average 3.0% (CPI) annually over both the short and long-term.
- Expected stock market return of 11% on the S&P index (this is the Martini’s guess)
- T-bills are currently yielding 4%
- Current mortgage rates are:
- Adjustable 5 year balloon 25%
- Fixed 15 year 75%
- Fixed 30 year 25%
- Closing costs are expected to be 3% of any mortgage
- They will finance closing costs in any refinance
- Insurance Information
Life Insurance
Policy 1 Policy 2
Insured Booth Needa
Owner Booth Needa
Beneficiary Children (25% each) Booth
Face Amount $200,000 $150,000
Cash value 0 0
Type of Policy Term Term
Settlement Options Lump Sum Lump Sum
Premium (annual) $650 $450
Health Insurance – Employer provides during employment only. The current coverage is for Booth and Needa.
Disability Insurance – Neither has disability insurance
Homeowner’s Insurance – HO3 on both primary residence and vacation home.
Residence Vacation Home
Dwelling $300,000 $150,000
Co-Insurance 80/20 80/20
Deductible 0 0
Umbrella Policy – $3,000,000
Automobile Insurance – Maximum liability, no comprehensive or collision.
- Investment Data
– Emergency fund is at $20,000
– The Martinis can accept moderate risk
– Booth’s IRA investment portfolio is $200,000 with half invested in low to medium risk equity mutual funds. Needa is beneficiary
– The other half is in staggered maturity short-term treasury notes.
– Booth Martini expects to use the income from the treasury notes to make up any short fall between his retirement needs and his 401(k) plan for period of time until Social Security benefits are received (would like to start at 62, understands benefits will be reduced).
-Booth is currently earning 5.0% on the short-term treasury notes, though when they mature, 4.0% will be the going rate on any new investments in this type of security.
-Other than IRAs, Needa’s business, and any other retirement accounts, all assets are listed as JTWROS (joint tenants with rights of survivorship).
- Income Tax Information
– Booth and Needa Martini file a joint tax return and are both average and marginal 28% taxpayers with state income tax of 5%.
VII. Retirement Information
-The present value of Booth’s Social Security benefits at 65 is $13,500 per year or 80% of that amount at age 62. Social Security benefits are expected to increase at the same rate as inflation (listed above).
-Booth has the 401(k) plan at work which currently has a value of $400,000.
-Needa has no IRA funding, but created a SEP-IRA plan for her business and it has a balance of $100,000 (split into a guaranteed investment contract fund and a money market fund)
VIII. Gifts, Estates, Trusts, and Will Information
Gifts – In 1986, Booth gifted $200,000 to each of his four children. The $800,000 was put into an irrevocable trust. Needa has made no taxable gifts during her lifetime.
Estates – For purposes of estimating estate tax liability (of either spouse):
- Last illness and funeral estimated at $20,000
- Estate administration expense estimated at $30,000
Wills – Booth and Needa have simple wills leaving all probate assets to the other. Debts and taxes are to be paid from the inheritance of the survivor.
- Statement of Financial Position
| Booth and Needa Martini
Statement of Financial Position |
|||
| ASSETS | LIABILITIES and NET WORTH | ||
| Cash and Equivalents | Liabilities | ||
| Cash (money market) | $40,000 | Current: | |
| Total Cash | $40,000 | Credit Card (hers) | $15,000 |
| Invested Assets | Credit Card (his) | $25,000 | |
| Publications, Inc. | $100,000 | Auto (his) note balance | $20,000 |
| Need’s Advertising, Inc. | $90,000 | Auto (hers) note balance | $10,000 |
| Needa’s Investments | $100,000 | Home Equity Line of Credit | $40,000 |
| Booth’s Investments | $200,000 | Total Current Liabilities | $110,000 |
| Booth’s 401(k) (vested) | $400,000 | ||
| Total Investments | $890,000 | Long Term: | |
| Mortgage – Residence | $100,000 | ||
| Personal Use Assets | Mortgage – Vacation Home | $120,000 | |
| Primary Residence | $300,000 | Total Long-Term Liabilities | $220,000 |
| Vacation Home | $150,000 | ||
| Personal Prop./Furniture | $100,000 | Total Liabilities | $330,000 |
| Auto (his) | $40,000 | ||
| Auto (hers) | $22,000 | Net Worth | $1,212,000 |
| Total Personal Use | $612,000 | ||
| Total Assets | $1,542,000 | Total Liabilities & Net Worth | $1,542,000 |
All assets are stated at fair market value.
Liabilities are stated at principal only.
CASE ASSIGNMENT
Your job as a financial planner is to develop a comprehensive financial plan for Booth and Needa Martini. You can make assumptions along the way, but must justify the assumptions with data and use those assumptions in to make your recommendations. A lot of data about this family has been presented in the previous pages. Carefully look over the information. Some information is more relevant than other information. You must determine how to approach this information and develop a plan that maximizes the financial way of life for the Martini family, without taking an inordinate amount of risk.
In your financial plan you must address the following areas:
- Description and Scope of the plan (20 points)
- Statement of Goals (10 points)
- Retirement Needs Analysis (50 points)
- Calculate the amount needed in retirement
- Bring lump sum needed back to the present
- Establish the current value of projected future investments
- Compare resources and needs
- Establish additional savings needed to reach goals (if any)
- Insurance Needs Analysis (50 points)
- Determine amount/type needed to fund pre-retirement
- Determine amount/type needed to fund the retirement period (based on life expectancy of each)
- Determine the total lump sum needed today
- Establish Insurance needs
- Investments/Savings Analysis (50 points)
- Determine status of financial asset allocation
- Determine appropriate risk levels currently
- Determine appropriate risk levels for retirement
- Determine if the businesses should be sold, and when
- Determine the status and rational for keeping residence and vacation home properties (or liquidating)
- Gifts, Estates, Trusts, Will Analysis (10 points)
- Estate planning issues
- Who gets what/most efficient way?
- Estate planning issues
- Modifications to current situation in order to meet the goals (50 points)
- Submit a post-modification statement of financial position
- Summary/Plan Recommendations (40 points)
- You must sell this plan to the Martini’s as the plan then need to adopt.
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