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Karl and June Monroe

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Michael Chiadis

on 30 May 2015

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Transcript of Karl and June Monroe

Letter of Engagement
Reviewing and prioritizing the goals and objectives of your current financial situation, including a statement of financial position, statement of cash flows, budget, and income tax analysis
Developing a financial management strategy, including financial projections and analysis;
Assessing exposure to financial risk and developing a risk management plan
Completing a retirement planning assessment, including financial projections of assets required at estimated retirement date (80% of current annual income)
Executive Summary
Karl and June Monroe - 37 year old married couple living in Texas
3 children
Sebastian - age 10
Sandy - age 5
April - Age 2
Support their respective mothers, Gerdi and Maria
Karl owns a bar - Marlo's
5 part-time employees
June works at Wood National Bank
Provide a standard of living after retirement of 80% of pre-retirement earnings
Accumulate sufficient assets to send their children to state university
Minimize income tax liability
Expand Marlo's to include a daytime grill in 5 years
Become Mortgage free by retirement
Develop an Estate Plan
Expect Inflation to average 3% annually
Expect June's salary to increase 5% annually
Mortgage rates are 7.5% for 15 year, 8% for 30 years
25% marginal federal income tax rate
Comfortable assuming an 11% investment return for retirement needs analysis
During retirement, 6% annual rate of return
Investment risk on a scale of 1-10 (1 being very conservative, 10 being very aggressive) is a 7
Karl and June Monroe
Tim Stenger, Jason Leaver, Makendy Massillon, Michael Chiadis, Ricardo Cobanera
This financial plan provides a general overview of certain aspects of your family’s financial position.
It is designed to provide educational and/or general information and is not intended to provide specific legal, accounting, tax, or other professional advice.
For specific advice on these aspects of your overall financial plan, you should consult with your professional advisers, such as an accountant, estate planning lawyer, and tax planner.

a road map to financial stability

Risk Coverage is decent
Reasonable Net Worth Goals
June has consistent income
Marlo's has growth potential
Rental Property
Lacking in Emergency Funds
well below 3 month recommendation
Cash flow management needs improvement
possibly living beyond their means
re-evaluate spending habits

Lacking an Estate Plan
only have Simple Wills
No trusts
Debt Management
credit card debt
expensive car note
Financial Statements
Cash Flow
Financial Position
Insurance Planning
Widely accepted minimum risk benchmark measure for various types of insurance to be considered are as follows:

Life 10-16 time gross salary
Health $1M lifetime cap
Disability 60-70% gross salary
Homeowners HO-3 with replacement value
Auto Replacement value
Liability $1-3 million

Current Life Insurance Coverage
Human Life Value Analysis
June's Income Needs (Karl's Insurance)
Recommended Life Insurance Plan
$750K 30-year level term policies for each
Karl $750K coverage for
per month
June $750K coverage for
per month

Other Insurance Needs
Health Insurance
Have health insurance through June's employer
All family members covered
Deductible of $400
100% on first $2,000, 80% thereafter
Only good while June is employed by Wood National
Dental and Vision Insurance
Disability Insurance
Karl has an own-occupation that provides a benefit of $2,000 per month after 30-day elimination period
He should look to increase coverage, as it only covers 38% of his net income
June has own-occ that covers 65% after a 90-day elimination period - sufficient coverage
Homeowners and Automobile Insurance
Currently have a HO-3 policy with replacement value and carry a $250 deductible, dwelling value of $97,000 80% coinsurance, $739 yearly premium
increase coverage to $105,000
Need to improve car insurance coverage
add rider for replacement value coverage
increase collision and comprehensive deductibles
Annual Premium of $216
June should inquire about coverage areas with plan manager
Should ensure the plan covers braces and oral surgery
Most companies offer inexpensive coverage in conjunction with dental
Liability Umbrella Policy and Long Term Care
They do not currently carry a PLUP
invest in a $1-3M PLUP
Neither carry a LTC policy
less valuable and not as popular, but should explore the possibility nonetheless
Insurance Summary
Life - Buy $750K 30-year level term policies for each with premiums for Karl of $67.28 and June $112.28 per month
Health - Be thinking of a backup plan should June become unemployed and COBRA coverage expires after 18-36 months
Dental - Ensure covered for children’s braces and family oral surgery
Vision - Check with employer for offered coverage
Disability - Karl should attempt to improve his coverage
Homeowners - Increase to replacement value; increase deductible to $500 or $1000
Automobile - Increase to replacement value; increase collision deductible to $1000 and comprehensive to $500
PLUP - Buy a $1-3M policy
LTC - Explore policies
Investment Planning
Financial Ratios
Emergency Fund
Consumer Debt Management
Currently have $8200 in credit card debt
could save $1,205 in interest by paying off debt
Pay off consumer debt by selling part of their low-yielding fixed income
reduces negative leverage
Long Term Debt - Home Mortgage
Forward Looking Investment Positions
Sell Corporate Bond Fund ($10,800
Sell Balanced Fund ($5,600)
Talk to 401k administrator to change asset allocation

Retirement Planning
Karl's needs at 62
June's needs at 62
Income at retirement: $193,699
SS payment: $33,475
401k Value at Retirement: $1,210,979
Funds per year at Retirement: $97,304
$97,304.00/$193,699.00 =

Karl's needs at 67
Income at retirement: $179,635
SS payment: $57,905
IRA Value at Retirement: $1,654,663
Marlo's: $387,338
Funds per year at Retirement: $157,592
$157,592/$179,635 =

June's needs at 67
Income at retirement: $247,215
SS payment: $55,440
IRA Value at Retirement: $2,083,317
Funds per year at Retirement: $180,951
$180,951/$247,215 =

Retirement Planning
Goal - 80% of pre-retirement earnings
Income at retirement: $151,248
SS payment: $34,964
IRA Value at Retirement: $963,113
Marlo's: $326,128
Funds per year at Retirement: $85,729.00
$85,729.00/$151,248.00 =

Combined Household at age 62 retirement
Funds at retirement: $85,729.00 + $97,304.00 = $183,033.00

Salaries at retirement: $151,248.00 + $193,699.00 = $344,947.00

$183,033.00/$344,947.00 =

Combined Household at age 67 retirement
Funds at retirement: $180,951 + $157,592 = $338,543

Salaries at retirement: $179,635 + $247,215 = $426,850

$338,543/$426,215 =

3 kids
Estate Planning
Compose a Letter of Personal Instruction and update wills
Letter of Personal Instruction (not a legal document) details the testator’s wishes regarding the disposition of tangible possessions and disposition of the decedent's body
information regarding the location of important personal documents, safe deposit boxes, outstanding loans, funeral arrangements, etc.
Update simple wills to complex wills to include children, other relatives
Appoint a Power of Attorney and Durable Power for Healthcare
Create a Living Will
Establish a Trust
The Monroe's have simple wills

Probably will not need to worry about paying Federal Estate Taxes since they are not close to the $5,430,000 lifetime exclusion
No letter of personal instruction
Possibly outdated simple wills
No power of attorney
No durable power for healthcare
No living will
No trusts of any kind
Education Planning
Three Children
Sebastian, Age 10
Sandy, Age 5
April, Age 2
The Monroe's wish to send them to a state university in Texas
roughly $20,000 per year today
A power of attorney is a legal document that allows the trusted, appointed person to act in Karl and June’s place
can be general or limited
Durable Power of attorney for Healthcare appoints a guardian or conservator to make health care decisions for a person who is incapacitated
springing or non-springing
Legal document that establishes the medical situations and circumstances in which Karl or June no longer want life-sustaining treatment
Usually only applies to the terminally ill
Reason for creating a trust
Assets within a trust avoid the probate process
The probate process is public information, and can cause a great deal of headaches
Trust Components
Items to Include in a Revocable Living Trust
Savings bonds, Mutual funds
June’s 401k
Karl’s IRA
Proprietorship in Marlo’s
Cash Value of life insurance
Baseball card collection
Establish 529 Plans
Their primary advantage is that contributions can grow in the account tax-deferred
Any funds needed for a qualified education expense (tuition, room and board, books, etc.) can be withdrawn completely free from federal income tax
The beneficiary of a 529 plan can be changed at any time
Establish 2 529 Plans
Funding the plans
Sell the Rental property for $84,000
Use mortgage payment after 15 year term is up to help fund the rest of April's education
Contribute an additional $3,820.15 per year for 15 years
Where those numbers came from:
Beneficiary 2023-2026: Sebastian, Age 10
Beneficiary 2028-2031: Sandy, Age 5
Beneficiary 2031-2034: April, Age 2
Recommended Statement of Cash Flows
Forward Looking Statement of Financial Position
· The Monroe’s will have $35,852 in cash reserves, compared to $17,500

· The Monroe’s will have $350,828 in total investible assets compared to $343,923

· Total assets = $550,862 versus $520,833

· Total Current Liabilities = $3200 versus $19,200

· Total Long Term Liabilities = $97,982 versus $98,836

· Total Liabilities = $101,182 versus $118,036

· Net worth = $449,680 versus $402,787
Comparison of Before and After Statement of Financial Position
Marlo's Expansion
Within the next 5 years, they would like to expand Marlo’s to include a daytime grill.
If they stop contributing $5000/ annually to the church and instead only contribute $200 per year, the Monroe’s would be able to expand Marlos with an annual contribution into a savings account (earning 3.5%) for 5 years.
PMT= $5000
I= 3.5%
N= 5
FV= $27,751
The Monroe’s will have saved up $27,751 in a saving vehicle to fund the expansion of Marlo’s.
Conflict of Interest
As a Fiduciary for the client, we cannot disclose any of the Monroe’s personal or financial information to anyone other than the Monroe’s. We disclosed information regarding the Monroe’s rental property to a real estate friend and he is now willing to purchase the property for more than it is valued at. There are several conflicts of interests going here:
None the Monroe’s information should be shared with anyone other the Monroe’s and the relationship between us and the real estate friend is another conflict of interest. Our friend would benefit from the purchase and subsequent sale (3 years later) of the rental property. As a Fiduciary, we must keep the best interest of clients in mind and not our friends.
529 Plans
If the Monroe’s want to fully fund their kids college funds, they will need to contribute $3820 annually for 15 years into 2 separate 529 plans
However, they currently don’t have adequate funds to contribute this amount annually.
They have some cash management decisions to make in regards to vacations and entertainment or they can help fund their children’s college education.
Other Issues/Considerations
Needs Analysis
Projects future earnings through life expectancy
Adds up FSE over WLE
Karl - $839K
June - $978K
Full transcript