# Case Approach To Financial Planning Quantitative/Analytical Mini-Case Problems

Marybeth and Anneal Yao

1.Marybeth and Anneal Yao are beginning to contemplate retirement. They are each forty-five years of age and have saved a total of \$500,000 for retirement. Marybeth and Anneal realize that they have not saved sufficiently to be able to retire early, fully retire without some part-time employment, or replace 100 percent of current pre-retirement income. As such, they are willing to explore different approaches to reach retirement.

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Marybeth and Anneal have a combined annual income of \$125,000. They believe their salaries will keep pace with inflation at 4 percent per year. They are also comfortable assuming that the effective annual rate of return on their retirement assets will be 9.0 percent before retirement and 6.5 percent after retirement. For now, Marybeth wants to keep the planning simple, projecting that they will both die in exactly forty years and that their retirement assets will be depleted with the exception of \$100,000 to cover funeral and burial costs. Lastly, they do not want to continue saving after they retire (either partly or fully).

As their financial planner, provide some assistance in calculating the amount of retirement assets needed on the first day of retirement, based on the two options listed below. Considering the information presented in the case, which outcome requires the lowest monthly (end-of-month) contribution if they also require that their retirement annuity grow by 4.0 percent per year to keep pace with inflation? (Ignore the effects of income taxes and Social Security on the answer.)

a.To retire at age fifty-five with an income replacement ratio of 60 percent.

b.To retire at age fifty-five with an income replacement ratio of 100 percent but work part-time for an additional ten years to offset half the projected annual need for those ten years. (In other words, Marybeth and Anneal will have a 50 percent replacement ratio for 10 years and a 100 percent replacement ratio thereafter.)

c.To retire at age sixty-five with an income replacement ratio of 100 percent.

Tara Woodyard

2.Tara Woodyard, age forty-four, plans to retire at age sixty-seven. Her life expectancy, accounting for family medical history, is age ninety-seven. Tara is single and currently earns \$56,000 per year as a university librarian. At her normal retirement age, she expects to receive \$28,700 in Social Security benefits (today’s dollars). She will also receive a small defined benefit pension in the amount of \$13,500 from a local municipality. She has come to you to determine whether she is on track to meet her retirement goal. Use the following assumptions and information to answer the questions that follow:

•She would like to use a 90 percent income replacement ratio, based on current earnings.

•She is currently contributing \$2,400 per year into a 403(b) plan [no employer match].

•Inflation is assumed to be 3.50 percent.

•She can earn a 6.50 percent after-tax rate of return on assets before retirement.

•She can earn a 4.50 percent after-tax rate of return on assets after retirement.

a.How much does Tara need, on her first day of retirement, to fund a capital depletion model of retirement?

b.Given her current level of savings, is Tara on target to reach her retirement goal?

c.If she has a capital needs shortfall, how much more must she save per year to reach her goal?

d.If she would like to obtain a capital preservation goal for retirement, how much will she need to have saved on her first day of retirement?

e.Given a capital preservation goal, is she saving enough on a yearly basis currently?

f.How much, in total, must she save yearly to reach a capital preservation model of retirement?

Annette Robinson

3.Annette Robinson is a sixty-three-year-old recent widow. Annette is attempting to do some tax and investment planning pertaining to her late husband’s traditional IRA account. She is seeking your advice as to the best course of action. She has informed you that her husband was sixty-nine at the time of his death and had not started taking a RMD.

a.What are the three distribution methods available to Annette?

b.Which method should she choose to maximize tax deferral? Based on the appropriate life expectancy table, how much will her first required distribution be? When will this distribution happen?

c.Which method should she choose to maximize the distribution? Based on the appropriate life expectancy table, how much will her first required distribution be? When would this distribution happen?

d.Which alternative would not have been available had her husband begun his required distributions?

e.If Annette had been younger than age fifty-nine, which alternative would have allowed her to take distributions without incurring a tax penalty?

Lyle and Melissa Murray

4.Lyle and Melissa Murray plan to retire when Lyle turns age sixty-five, even though his normal retirement age is age sixty-seven. Lyle has worked at the same firm for over thirty years. Melissa has worked only occasional temporary jobs over her lifetime. The Murrays have a few questions about Lyle’s defined benefit pension benefit and expected Social Security benefits. Use the following information to answer their questions:

•Lyle must choose from the following four defined benefit plan distribution options:

•\$3,000 for life with no survivor benefit

•\$2,700 for life with a 50 percent survivor benefit

•\$2,350 for life with a 67 percent survivor benefit

•\$2,000 for life with a 100 percent survivor benefit

a.Assuming (a) Lyle lives ten years after retiring, (b) Melissa lives an additional ten years beyond Lyle’s passing, and (c) the pension has no cost of living adjustment, which of the four alternatives should they choose in order to maximize their combined lifetime benefit?

b.What benefit alternative should they choose if Lyle lives another twenty years beyond retirement and Melissa lives an additional ten years beyond that?

c.If Lyle’s Social Security retirement benefit at age sixty-seven is \$2,300 per month, how much will they receive in yearly benefits if they both claim benefits when Lyle turns age sixty-five?

Juwan and Timi Clarke

5.Juwan and Timi Clarke are planning for retirement. Juwan has a number of retirement related questions he needs help answering. Use your retirement planning knowledge to address the following questions.

a.Juwan would like to withdraw \$365,000 from retirement savings when he retires. Assuming he can earn a 6.0 percent annualized rate of return on retirement assets, and that inflation will average 2.0 percent during retirement, how much will he need on his first day of retirement to fund twenty-four yearly payments?

b.What will be the inflation-adjusted rate of return (serial rate) if Juwan changes the rate of return and inflation assumptions to be 12.0 percent and 3.0 percent, respectively?

c.Timi will turn age fifty seven this year. She currently contributes to a 401(k) plan and wants to make an IRA contribution. Is she eligible to use the catch-up provision?

d.Juwan is eligible for a modest defined benefit pension when he retires at age sixty-seven. If Juwan elects a 100 percent joint and survivor annuity will he and Timi receive more or less than a 50 percent joint and survivor annuity? If Juwan elects an annuity payment without a survivor benefit, will he receive more or less than a 50 percent joint and survivor annuity? What must occur to obtain a no survivor annuity?

e.Juwan’s employer uses the following unit benefit formula to determine benefits in the defined benefit plan: 2 percent of final pay for each year of service. If Juwan works for twenty years and has a final year income of \$160,000 how much will he receive from the pension on a yearly basis?

f.If Timi is age fifty-five and earns \$46,000 per year, what is the maximum in annual additions that can be contributed to her qualified 401(k) account this year?

Jamal and Chyna Gwynn

6.Your clients, Jamal and Chyna Gwynn, would like you to determine if they are on track to meet their retirement goal. Use the following assumptions to answer the Gwynns’ retirement planning questions:

•Jamal: Age forty eight

•Chyna: Age fifty

•Desired Retirement Age: When Jamal turns Age sixty two

•Age to Begin Receiving Social Security Benefits: Age sixty two

•Full Retirement Age: Age sixty seven

•Earned Income: Jamal \$145,000

•Earned Income: Chyna \$210,000

•Bonus: Jamal \$25,000

•Retirement Income Replacement Ratio: 90 Percent

•Investment Rate of Return Before Retirement: 7.90 Percent

•Investment Rate of Return After Retirement: 5.50 Percent

•Inflation Rate Assumption (Presently and Going Forward): 3.00 Percent

•Growth Rate of Retirement Savings and Social Security Benefits: 3.00 Percent

•Marginal Federal and State Marginal Tax Rate Before Retirement: 29 Percent

•Marginal Federal and State Marginal Tax Rate After Retirement: 29 Percent

•Annual Social Security Benefit at Full Retirement: Jamal \$42,000

•Annual Social Security Benefit at Full Retirement: Chyna \$39,000

•Other Income in Retirement: \$80,000

•Combined Retirement Assets Held in Tax-Deferred Assets: \$1,500,000

•Combined Retirement Savings Using Tax-Deferred Accounts: \$42,000

•Other Retirement Assets: \$0

a.What is the retirement asset value needed on the first day of retirement, plus any additional annual savings needed per year, to fully meet a capital depletion retirement goal.

b.What is the value of assets needed to fund the capital preservation model of retirement? Can the Gwynns’ currently meet this need?

Marybeth and Anneal Yao

1.Marybeth and Anneal Yao are beginning to contemplate retirement. They are each forty-five years of age and have saved a total of \$500,000 for retirement. Marybeth and Anneal realize that they have not saved sufficiently to be able to retire early, fully retire without some part-time employment, or replace 100 percent of current pre-retirement income. As such, they are willing to explore different approaches to reach retirement.

Marybeth and Anneal have a combined annual income of \$125,000. They believe their salaries will keep pace with inflation at 4 percent per year. They are also comfortable assuming that the effective annual rate of return on their retirement assets will be 9.0 percent before retirement and 6.5 percent after retirement. For now, Marybeth wants to keep the planning simple, projecting that they will both die in exactly forty years and that their retirement assets will be depleted with the exception of \$100,000 to cover funeral and burial costs. Lastly, they do not want to continue saving after they retire (either partly or fully).

As their financial planner, provide some assistance in calculating the amount of retirement assets needed on the first day of retirement, based on the two options listed below. Considering the information presented in the case, which outcome requires the lowest monthly (end-of-month) contribution if they also require that their retirement annuity grow by 4.0 percent per year to keep pace with inflation? (Ignore the effects of income taxes and Social Security on the answer.)

a.To retire at age fifty-five with an income replacement ratio of 60 percent.

b.To retire at age fifty-five with an income replacement ratio of 100 percent but work part-time for an additional ten years to offset half the projected annual need for those ten years. (In other words, Marybeth and Anneal will have a 50 percent replacement ratio for 10 years and a 100 percent replacement ratio thereafter.)

c.To retire at age sixty-five with an income replacement ratio of 100 percent.

Tara Woodyard

2.Tara Woodyard, age forty-four, plans to retire at age sixty-seven. Her life expectancy, accounting for family medical history, is age ninety-seven. Tara is single and currently earns \$56,000 per year as a university librarian. At her normal retirement age, she expects to receive \$28,700 in Social Security benefits (today’s dollars). She will also receive a small defined benefit pension in the amount of \$13,500 from a local municipality. She has come to you to determine whether she is on track to meet her retirement goal. Use the following assumptions and information to answer the questions that follow:

•She would like to use a 90 percent income replacement ratio, based on current earnings.

•She is currently contributing \$2,400 per year into a 403(b) plan [no employer match].

•Inflation is assumed to be 3.50 percent.

•She can earn a 6.50 percent after-tax rate of return on assets before retirement.

•She can earn a 4.50 percent after-tax rate of return on assets after retirement.

a.How much does Tara need, on her first day of retirement, to fund a capital depletion model of retirement?

b.Given her current level of savings, is Tara on target to reach her retirement goal?

c.If she has a capital needs shortfall, how much more must she save per year to reach her goal?

d.If she would like to obtain a capital preservation goal for retirement, how much will she need to have saved on her first day of retirement?

e.Given a capital preservation goal, is she saving enough on a yearly basis currently?

f.How much, in total, must she save yearly to reach a capital preservation model of retirement?

Annette Robinson

3.Annette Robinson is a sixty-three-year-old recent widow. Annette is attempting to do some tax and investment planning pertaining to her late husband’s traditional IRA account. She is seeking your advice as to the best course of action. She has informed you that her husband was sixty-nine at the time of his death and had not started taking a RMD.

a.What are the three distribution methods available to Annette?

b.Which method should she choose to maximize tax deferral? Based on the appropriate life expectancy table, how much will her first required distribution be? When will this distribution happen?

c.Which method should she choose to maximize the distribution? Based on the appropriate life expectancy table, how much will her first required distribution be? When would this distribution happen?

d.Which alternative would not have been available had her husband begun his required distributions?

e.If Annette had been younger than age fifty-nine, which alternative would have allowed her to take distributions without incurring a tax penalty?

Lyle and Melissa Murray

4.Lyle and Melissa Murray plan to retire when Lyle turns age sixty-five, even though his normal retirement age is age sixty-seven. Lyle has worked at the same firm for over thirty years. Melissa has worked only occasional temporary jobs over her lifetime. The Murrays have a few questions about Lyle’s defined benefit pension benefit and expected Social Security benefits. Use the following information to answer their questions:

•Lyle must choose from the following four defined benefit plan distribution options:

•\$3,000 for life with no survivor benefit

•\$2,700 for life with a 50 percent survivor benefit

•\$2,350 for life with a 67 percent survivor benefit

•\$2,000 for life with a 100 percent survivor benefit

a.Assuming (a) Lyle lives ten years after retiring, (b) Melissa lives an additional ten years beyond Lyle’s passing, and (c) the pension has no cost of living adjustment, which of the four alternatives should they choose in order to maximize their combined lifetime benefit?

b.What benefit alternative should they choose if Lyle lives another twenty years beyond retirement and Melissa lives an additional ten years beyond that?

c.If Lyle’s Social Security retirement benefit at age sixty-seven is \$2,300 per month, how much will they receive in yearly benefits if they both claim benefits when Lyle turns age sixty-five?

Juwan and Timi Clarke

5.Juwan and Timi Clarke are planning for retirement. Juwan has a number of retirement related questions he needs help answering. Use your retirement planning knowledge to address the following questions.

a.Juwan would like to withdraw \$365,000 from retirement savings when he retires. Assuming he can earn a 6.0 percent annualized rate of return on retirement assets, and that inflation will average 2.0 percent during retirement, how much will he need on his first day of retirement to fund twenty-four yearly payments?

b.What will be the inflation-adjusted rate of return (serial rate) if Juwan changes the rate of return and inflation assumptions to be 12.0 percent and 3.0 percent, respectively?

c.Timi will turn age fifty seven this year. She currently contributes to a 401(k) plan and wants to make an IRA contribution. Is she eligible to use the catch-up provision?

d.Juwan is eligible for a modest defined benefit pension when he retires at age sixty-seven. If Juwan elects a 100 percent joint and survivor annuity will he and Timi receive more or less than a 50 percent joint and survivor annuity? If Juwan elects an annuity payment without a survivor benefit, will he receive more or less than a 50 percent joint and survivor annuity? What must occur to obtain a no survivor annuity?

e.Juwan’s employer uses the following unit benefit formula to determine benefits in the defined benefit plan: 2 percent of final pay for each year of service. If Juwan works for twenty years and has a final year income of \$160,000 how much will he receive from the pension on a yearly basis?

f.If Timi is age fifty-five and earns \$46,000 per year, what is the maximum in annual additions that can be contributed to her qualified 401(k) account this year?

Jamal and Chyna Gwynn

6.Your clients, Jamal and Chyna Gwynn, would like you to determine if they are on track to meet their retirement goal. Use the following assumptions to answer the Gwynns’ retirement planning questions:

•Jamal: Age forty eight

•Chyna: Age fifty

•Desired Retirement Age: When Jamal turns Age sixty two

•Age to Begin Receiving Social Security Benefits: Age sixty two

•Full Retirement Age: Age sixty seven

•Earned Income: Jamal \$145,000

•Earned Income: Chyna \$210,000

•Bonus: Jamal \$25,000

•Retirement Income Replacement Ratio: 90 Percent

•Investment Rate of Return Before Retirement: 7.90 Percent

•Investment Rate of Return After Retirement: 5.50 Percent

•Inflation Rate Assumption (Presently and Going Forward): 3.00 Percent

•Growth Rate of Retirement Savings and Social Security Benefits: 3.00 Percent

•Marginal Federal and State Marginal Tax Rate Before Retirement: 29 Percent

•Marginal Federal and State Marginal Tax Rate After Retirement: 29 Percent

•Annual Social Security Benefit at Full Retirement: Jamal \$42,000

•Annual Social Security Benefit at Full Retirement: Chyna \$39,000

•Other Income in Retirement: \$80,000

•Combined Retirement Assets Held in Tax-Deferred Assets: \$1,500,000

•Combined Retirement Savings Using Tax-Deferred Accounts: \$42,000

•Other Retirement Assets: \$0

a.What is the retirement asset value needed on the first day of retirement, plus any additional annual savings needed per year, to fully meet a capital depletion retirement goal.

b.What is the value of assets needed to fund the capital preservation model of retirement? Can the Gwynns’ currently meet this need?

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