Financial planning

Case Application 1

When I examined Richard and Monica's insurance policies, I found the following:

a. Medical coverage was adequate.

b. Auto insurance was at the minimum level for the state of $50,000 to $100,000 per accident.

c. Homeowners insurance was at a level of 50 percent of replacement cost for the house. They had a 90 percent coinsurance clause.

d. Richard had no disability coverage.

e. A note saying that Richard didn't want long-term care insurance, but Monica was interested in looking at it.

Questions

1. What is your recommendation for auto insurance?

2. What is your homeowners insurance recommendation?

3. Give the advantages for Richard obtaining disability insurance.

4. Do you believe Richard and/or Monica should have long-term care insurance? Why?

5. Complete the other insurance part of the financial plan.

Case Application 2

Richard and Monica estimated they would have adjusted gross income of $108,000 in the current year and would have exemptions of $7,900 and deductions of $25,000. Their aver- age combined federal and state tax bracket was 33 percent.

Questions

1. Compute their projected taxes for the year.

2. Richard wanted to know if he should take a $10,000 tax deduction this year or wait until next year to do so. He was inclined to do so now even though his average tax bracket would likely be 28 percent next year. What do you think he should do?

3. Monica wanted to know if they should place their savings into a qualified pension or save it personally. She said that Richard often had modest losses, not gains, each year. What is your recommendation?

4. Monica asked what tax-planning strategies you would recommend for them? Do so while completing the tax-planning section of the plan.

Case application 3

Monica asked that we meet to see if I could help to reduce the differences between them. When the time came, she started the conversation by saying that Richard wasn’t saving any money at all. They hadn’t started implementing. She said he spent a good deal of time buy- ing and selling stocks. He seemed to be influenced by the weekly ups and downs of the market. At least temporarily, however, he had raised the quality of the stocks he was buying.

Richard seemed a little annoyed and said that Monica never wanted to sell any securities. She almost always told him to wait. She said the shares would come back. When I asked what money meant to them, Richard said an opportunity to gamble and Monica replied a chance to lose what you’ve accumulated. As far as their long-term goals were concerned, Richard said he had no real long-term goals. The future was too fickle. He said who knew what fate had in store for them. Monica’s goal was to feel secure. I had the feeling that her remark was in response to Richard’s behavior. She wouldn’t allow herself to think of anything beyond security until Richard’s activities could be controlled.

Questions

1. What should be done about Richard’s spending?

2. What kind of investment behavior is Richard demonstrating? What can be done about it?

3. What is Monica’s investment behavior called? How can it be helped?

4. Contrast their two views of money. Do you have any recommendations?

5. How can Monica’s fears be dealt with?

Case application 4

In working out the capital needs analysis, it became apparent that there was need for an additional $17,000 of savings annually over what was previously calculated. The first reason had to do with a recent job development that resulted in a projected moderation in Richard’s raises in salary to a level 1–2 percentage points below the inflation rate and that made his job more risky. The second was the running of the total portfolio management approach, which indicated that the assumed investment rate needed to be lowered to 5 percent. Richard took the news in stride and said he thought I was too negative. Things would work out in the job. He would just have to invest more aggressively than originally planned.

Monica, on the other hand, was shaken. She thought that their tolerance for risk would have to be cut back. She said she would consider taking a full-time job if necessary. Richard shook his head as if to say no but didn’t speak. Monica thought they could down- size by selling their house and realizing an extra $100,000. She wondered what level of insurance she could afford and whether they should cut back on the amount. Richard didn’t like that idea.

Monica said disagreement on financial matters was a feature throughout their marital lives. She thought that I should make the recommendations. She pledged to follow them. Somewhat surprisingly to me, Richard agreed as well.

Questions

1. Go over the alternatives for increasing savings.

2. What do you think of Monica’s offer to take a job?

3. Under the TPM approach, should the risky portion of their asset allocation be raised or

lowered?

4. Should their insurance be raised or lowered?

5. Do you feel they should downsize their dwelling?

6. What are your recommendations? Incorporate savings, investing, life insurance, and

other relevant areas.

7. Should there be controls set up to assist in ensuring that the recommendations are followed?

8. What kind of follow-up with the advisor would you recommend?

9. Complete the financial plan.