The Lee Case Study
Megan and Kevin Lee--The New ParentsBy now you are very familiar with Megan and Kevin Lee (the newlyweds); however, five years have passed since you first met Megan and Kevin. Megan has earned her Ph.D. and is an Assistant Professor of Social Work at a major university. Accepting this position required that Megan and Kevin move, and Kevin decided to go back to school for his MBA which he completed just last year. He is now a manager in a large consulting firm.There is also a new family member. Mark, Megan and Kevin’s first child, was born one month ago. This, of course, is leading to all sorts of changes in the Lee household including new financial planning concerns. And as you will see upon reviewing the updated financial information for the Lee family, Megan and Kevin have accomplished some of their short-term and intermediate-term goals. They now pay all new credit card charges off in full upon billing, and they have completely paid off the credit card debt they had when we first met them. They have also managed to buy a second car and to replace their Explorer, but they do have a fairly large debt on their new Jeep Cherokee. In addition, they purchased their first home soon after Kevin finished his MBA. They used the proceeds from the sale of 242 shares of Megan's Fidelity Magellan fund as the down payment.Some of their original financial goals still remain, however. They are still working on accumulating an adequate emergency fund as well as saving for retirement and to help support Kevin’s father during his retirement. And now with Mark’s birth, they have started thinking more seriously about insurance, college education funding, and estate planning. In addition, as a result of Kevin’s MBA, their student loan debt is higher than when we first met the Lees.As you can see, Megan and Kevin Lee still have a great need for your financial planning assistance. By reading the following pages, you will be able to get a quick update on their current financial position.
Security Investments
Cost
Current Value
Security
# Shares
Date Acquired
Per Share
Total
Per Share
Total
AT&T3
43
8/15/01
$23.50
$ 1,011
$38.25
$ 1,645
Fidelity Magellan Mutual4 Fund (inherited) FMAGX
275.000
9/18/91
$12.23
$ 3,363
$128.18
$35,250
401(k)--DeVitt Consulting:3 Vanguard 500 Index Mutual Fund VFINX
47.535
Purchases & earnings from 9/01 to 5/04
Average
$55.25
$ 2,626
$ 65.16
$3,097
401(k)--J. White Consulting:3
403(b)--Northern University:4
1Federally insured
2Kevin and Megan’s joint account with right of survivorship
3Kevin’s separate property
4Megan’s separate property
Market Value
Replacement Value
Clothing
$ 9,500
$15,000
Furniture & appliances
$27,000
$35,000
Stereo, TVS, cameras, etc.
$ 6,000
$ 9,000
Computer, printer, & software
$ 3,200
$ 3,500
Golf clubs
$ 2,000
$ 3,000
Jewelry
$ 5,000
$ 6,000
Miscellaneous household items
$ 4,000
$10,000
LIABILITIES - January 1, 2007
3Excluding new purchases, but including cash advances.
Projected 2007 Income
Salary (Kevin)
$72,000
Bonuses
$ 0
Salary (Megan)
$52,000
Bonuses
$ 0
Consulting income (Megan)
$ 0
Interest1
$ 285
Dividends2
$ 1,026
Capital gains distributions3
$ 1,100
Monthly salary after tax deductions:
Kevin
Megan
Gross salary
$6,000
$4,333
Federal income tax withholding
900
650
State income tax withholding (3%)
180
130
Projected 2007 Expenses
Cash Flow Monthly
Cash Flow Annually
House payment ($13,491 interest plus $1,473 principal repayment)
$1,247
$14,964
Real estate taxes
275
3,300
Homeowners insurance
80
960
Utilities (electricity and gas)
250
3,000
Telephone
65
780
Cable TV
55
660
Groceries
500
6,000
Food away from home
150
1,800
Auto loan payments
801
9,612
Auto maintenance (gas, repairs, licenses, etc.)
175
2,100
Clothing
350
4,200
Medical/dental expenses (not covered by insurance)
???
???
Insurance premiums paid through withholding
???
???
Contributions to 401(k) and 403(b) pension plans
???
???
Auto insurance (paid semi-annually in March and September)
1,042
Federal income tax withholding
1,550
18,600
Social security tax withholding
790
9,480
State income tax withholding
310
3,720
Appliance, furniture, and equipment purchases
3,000
Personal care
60
720
Entertainment
150
1,800
Vacations
2,500
Employee business expenses (not reimbursed by employer)
85
1,020
Charitable contributions
50
600
Gifts ($35/mo. Jan. through Oct., $600/mo. Nov. and Dec.)
1,550
Reinvested interest, dividends, and capital gains distributions
2,411
Education loan payments
799
9,588
Line of credit payment (target payment)
300
3,600
Child care ($3,600 eligible for child care credit/flexible spending acct)
250
3,000
Planned savings ($100/mo.--emergency fund, $150/mo.—Kevin’s father)
250
3,000
Miscellaneous
125
1,500
Tasks:
Kevin currently has $3,097 vested in his former employer's (DeVitt Consulting) 401(k) plan. He can either 1) withdraw this money and use it as he wishes or he can 2) roll it over into a rollover IRA. If Kevin withdraws the money and does not roll it over into an IRA, how much money would he have left after paying the early withdrawal penalty and federal income taxes? If Kevin rolled the 401(k) money into an IRA, how should the transaction be handled so that he could avoid the 20% federal withholding on rollovers? What would you recommend him to do with this money? 10 pts
Kevin has just become eligible for his current employer's (Richardson Consulting) 401(k) plan. If Kevin makes the maximum contribution allowed under this plan, how much would his contribution be in 2007? How much would Richardson Consulting's matching contribution be in 2007? 5 pts
Assuming Kevin makes maximum contribution, in addition to employer matching (which is the answer from previous question) for 30 years and assumes a 12% rate of return. How much will he have in his retirement account in 30 years? 5 pts
Using the answers to Question 3 as the amount in Kevin's retirement account when he reaches retirement, how much could Kevin withdraw from this account each year if he wanted to make 25 withdrawals and the account earned 5% annually over this 25-year period? 10 pts
Megan's basic retirement plan is a defined benefit plan. Assuming Megan works for Northern University for 32 years, how much will she have contributed to the basic pension plan? If her annual salary is $75,000 (in current dollars) when she retires, how much will her annual retirement benefit be (in current dollars)? 5 pts
Northern University also offers a 403(b) plan. If Megan makes the maximum contribution allowed under this plan, how much would her contribution be in 2007? How much would Northern University contribute to her 403(b)? 5 pts
The Browns (Megan's aunt and uncle both age 52) have asked Megan for help in determining how much they should be saving for their retirement. One of Margaret and Bob Brown's long-term goals is to retire in 15 years when Bob is 67 and live until 97. Their current living expenses are approximately $100,000 (excluding savings), but they feel they would be able to live during retirement on about 90% of their current living expenses. Assuming they continue to work for their current employers, they expect to receive approximately $2,300 a month from Bob's retirement plan and about $1,200 a month from Margaret's employer plan. They estimate Bob's monthly Social Security benefit would be $1,200 and Margaret's would be $900. Calculate Bob and Margaret's retirement income and investment needs for life assuming an average rate of inflation of 3%, 7% return on investments after retirement, and 9% return on investments prior to retirement. Use both Annuity and Capital preservation model approach. 30 pts
Since Kevin and Megan has not done any estate planning yet. As a Financial Planner what basic estate planning document would you recommend them to get started with? 5 pts
Kevin and Megan would like to start saving for the college education of their new born baby Mark who is a month old. They have decided to send Mark to State University and estimate that the currently it cost $15,000 per year in today’s dollar for tuition, fees, room and board. The investment rate of return for the savings plan is 8%. Education inflation is expected to be 6% annually. They assume that Mark will have 4-year college education. Calculate how much they will need save annually in order to fulfill Mark’s education goal. 25 pts
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