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7 Mar 2019

With three dependent children, the Brocks are assessing their life insurance. Pam has $5,000 of coverage. Josh has life insurance coverage equal to approximately eight times his annual salary.

With approximately 20 years to retirement, Pam and Josh Brock want to establish a more aggressive investment program to accumulate funds for their long-term financial needs. Josh does have a retirement program at work. This money, about $110,000, is invested in various conservative mutual funds.

In addition, the Brocks established their own investment program about four years ago, and today they have about $36,000 invested in conservative stocks and mutual funds. In addition to their investment program, the Brocks have accumulated $11,000 to help pay for the children’s college educations. Also, they have $5,000 tucked away in a savings account that serves as the family’s emergency fund. Finally, both will qualify for Social Security when they reach retirement age.

Questions

Q1. What changes would you recommend for the Brock's life insurance coverage?

Q2. What would you view as the strengths and weaknesses of the Brocks' financial situation at this stage in their lives?

Q3. Given that Pam is 43 and Josh is 45 and they have three children who will soon begin their college educations, what investment goals would be most appropriate?

Q4. Describe an investment portfolio (asset types, allocation, risk-return) that you would recommend for the Brocks.

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Jean Keeling
Jean KeelingLv2
7 Mar 2019
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Related questions

Life Situation Financial Date

Pam 43 Monthly income $4,900

Josh 45 Assets $262,700

Children ages 16, 14, and 11 Living expenses $4,450

Liabilities $84,600

Emergency fund $5,000

In recent years, the Brocks have made extensive use of mutual funds in their investment portfolio. However, they are concerned that their selection of the funds may not be coordinated. With over 9,200 different mutual funds, available this financial marketplace is confusing. The Brocks start the evaluation process by connecting various types of mutual funds to their investment goals. Next, they assess the past performance and management of the funds. Finally, they talk with various financial advisers and other investors to gather additional information.

1. How might Pam and Josh use mutual funds for various investments goals.

2. What types of mutual funds might be considered by the Brocks for their investment portfolio?

RETIREMENT AND ESTATE PLANNING

Life Situation

Financial Data

Pam, 48

Josh, 50

Children ages 21, 19 and 16

Monthly income $6,700

Assets $242,500

Living expenses $5,600

Liabilities $69,100

With two children in college, the brocks once again find their life situation changing. Compared to five years ago, their total assets have declined due to college expenses. The Brocks’ oldest child will graduate next year, but the youngest will enter college in a couple of years. The drain on the family’s finances will continue.

While the family’s finances are adequate, both Pam and Josh are beginning to think more about retirement. Over the years, Josh has taken advantage of different career opportunities. Today his annual salary is higher than ever. However, his employment changes have resulted in a smaller pension fund than would have been available had he remained with the same organization.

The current value of his pension plan is just over $115,000. The investment program he and pam started almost 10 years ago is growing and is now worth about $62,000. But they still worry whether they will have enough money to finance their retirement when Josh retires in 15 years.

Pam and Josh should also be concerned with various estate planning actions. They have talked about a will and investigated the benefits of several types of trusts. However, they have not taken any specific actions.

Questions

Q1. What steps do the Brocks need to take to prepare for retirement?

Mary and Harry Reser, 57 and 62, are looking ahead to retirement early next year. They are thinking about heading south to a cheaper and warmer state but haven't made a firm decision. Harry is the sole breadwinner and earns $64,543, plus an additional $8,169 from investments.

The Reser's two main concerns are longevity and taxes. "We want to take income from investments with the least amount of tax liability and make the money we have accrued last as long as we do," notes Harry. He also noted a concern about taking money out of tax-deferred plans in the correct manner to avoid IRS penalties.

The Reser's can be considered "millionaires next door," with an impressive net worth of $1,065,951. They have absolutely no debt and the following assets: $32,000 in a 2% bank passbook account, $347,365 in telephone stock; $224,901 in Harry's 401(k); $31,000 in an annuity; $202,685 in mutual funds; $23,000 in whole life insurance; their $190,000 home; and $15,000 of personal property.

No information was provided as to the type of mutual funds or the 401(k)'s asset allocation (i.e., the percentage of the account in different types of assets like stocks and bonds). Harry contributes 15% of his salary to the 401(k) and appears to have been doing this for many years. Neither spouse has an individual retirement account (IRA), however.

The Resers estimate that their monthly expenses total $1,500. The are concerned about the future cost of health care and note that, in retirement, "the biggest expense not in our current budget will be medical insurance." Currently, Harry shares part of the cost of health coverage with his employer but this coverage will end after he retires. His employer also provides short-term disability coverage and matches his 401(k) contribution up to the first 8% of pay.

The Reser's car and home have $500,000 and $300,000 of liability coverage, respectively. They do not own an umbrella liability policy. The Resers are thinking of tapping their $23,000 of life insurance cash value. "We do not feel that we need life insurance any longer," says Harry, "and will most likely cash them in."

Taxes were mentioned several times as a major concern. The Reser's taxable income is $50,543. If their adjusted gross income in retirement exceeds $44,000, 85% of their Social Security benefits will be taxed. Tax on Social Security is figured on what is known as "preliminary adjusted gross income." This figure includes all earnings, pensions, dividends and interest from investments, including tax-free municipal bonds, and half of a person's Social Security benefit.

The Resers do not have wills. They have no children and it is unclear who their heirs are.

1. Discuss the strengths and weaknesses of the Rese family's financial situation.

Their strength is their net worth of $1,065,951, their job contribute 8% of their 401k, they invest for the future and they have no debt.

Their weakness is that they can be penalize by the IRS, they have no kids so there’s no will and they have no future health insurance.

2. Comments about Reser family's cash flow.

4. Calculate the savings required to reach Reser family’s financial goals.

5. Recommend 3 to 5 action steps to improve Rese family's financial.

6. Recommended financial products such as bank accounts, insurance policies, and mutual funds for Rese’s family.

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