case study
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should be typed, single space, and not more than four pages (You must include all references used. )
Question no:1
Mitch and Karen: A Case Study in Retirement Planning
Mitch and Karen are 58 and 55 years old, respectively. They are a happy and hardworking couple who
have raised two responsible, smart and loving children, Lisa and Mark. Lisa is in her first year of graduate
school; Mark is a college senior. Thanks to summer jobs and significant financial help from mom and dad,
both children should be able to keep their student loans at manageable levels.
Mitch has been the primary earner of the family. Karen quit her job when Lisa was born. Once both
children were in school, she returned to ork as a teacher s assistant at their elementar school the job didn
t pa much but it allo ed Karen to be home at the same time as the children When Lisa and Mark started
high school, Karen also resumed working in retail.
Karen and Mitch consider themselves to be relatively frugal. Mitch is quite handy. Over the years, home
improvement projects often took up his weekends. He has always mowed his own lawn, while Karen and
the kids pitched in with the yard work.
Mitch and Karen are rightfully proud of the children they have raised. They are also glad their kids are not
going to be saddled with tens of thousands of dollars in student loan debt.
But as they approach their 60s, Mitch and Karen have realized they have paid a price for the choices they
have made: while they have little debt, they have relatively little saved for their retirement. Mitch has
worked for his current employer for 10 years, but since the kids started college, he could only afford to
contribute the minimum needed to receive the company match in his 401(k). His account is worth about
$132,000.1 Savings from previous employer plans were rolled into an individual retirement account (IRA).
However, on more than one occasion, money was withdrawn to cover some college expenses for Lisa
and Mark. The rollover IRA currently has a balance of $65,000.2
Karen has never worked in a job that offered a retirement plan. In retrospect, she and Mitch recognize
they should have at least funded an IRA for her, but there always seemed to be a more pressing need for
the money the mortgage, braces, medical bills, school supplies, clothes, home repairs and modest
vacations, mostly to visit family. Currently, whatever Karen earns from her two part-time jobs goes to
help Lisa and Mark with college expenses.
Once the kids are living on their own in a couple of years, Mitch and Karen plan to ramp up their
retirement savings. However, time is running out. They have already foregone decades of potential
investment gains and compounding. At this point, they have a combined $197,000 earmarked for a
retirement that is roughly a decade away.
Thank goodness for Social Securit Mitch s most recent estimated benefit statement projects that he will
receive a benefit of $2,000/month if he waits until his Full Retirement Age (or FRA for short) at 66 & 8
months to file. Karen has an FRA of 67. Due to time spent out of the paid workforce, she has only
contributed to Social Security for 29 years. In addition, because she needed a flexible work schedule, she
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accepted lower-paying jobs when she returned to the workforce. Therefore, her benefit is smaller,
estimated to be $800/month.
However, if both Mitch and Karen continue to work, their monthly benefit can increase. This is of
particular importance to Karen because Social Security bases your benefit on your 35 highest years of
income, adjusted for inflation. As a result, for each year that Karen continues to work, an earlier year
where she earned $0 will drop out of the equation. This will result in a larger benefit.
It would take a real commitment, but if Karen and Mitch were able to continue living on their current
tight budget, they could stash away a substantial sum of money for retirement. In a couple of years, both
of the kids will be out of college and (hopefully) supporting themselves. Until then, Mitch will contribute
$6,000/year to his 401(k) just enough to get his company s matching contribution of $3,000. After that,
he plans to increase his contribution to $18,000/year3 plus the company match until he retires in 2025. At
that point, he will start receiving Social Security. To make it easier to monitor his investments and take
withdrawals, Mitch plans to roll his 401(k) into his IRA, bringing the total to a bit more than half a million
dollars!
When Mitch retires, so will Karen. She ll be Her Social Security spousal benefit is larger than the one she
herself earned, so she will receive the higher amount. However, because she is starting Social Security
before her FRA, the amount she is entitled to will be reduced.
Karen and Mitch expect inflation to run 2% per year. This is how much they estimate their required income
and Social Security benefits will increase. They assume their investments will continue to earn a return of
6% per year.
They are delighted to learn they will receive $40,203/year from Social Security nearly half of the in income
the estimate the ill need recogni ing that the haven t accounted for ta es et in these estimates the plan
to ithdra the additional income the ll need from Mitch s IRA
After doing some rough projections, Mitch is shocked to realize that under this plan his IRA will be
exhausted in the year he turns 81! He and Karen will then be completely dependent on Social Security!
They will have to drastically reduce their lifestyle.
That is decide to see a financial advisor
Required
1. You as a financial advisor give suggestions to Mitch and Karen Based on what we have studied
in personal financial management course.
You report should include
►Analyze your current assets and liabilities for retirement (NET GROWTH) ( 10 marks )
►Estimate your retirement spending needs ( 10 marks )
►Identify your retirement housing needs ( 10 marks )
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►Determined your planned retirement income ( 15 marks )
►Develop a balanced retirement budget based on your retirement income ( 15 marks )
APA references ( 20 MARKS)