Retirement Case Study

THE FAMILY
Candi and Bob Sweet own a boutique truffle shop that offers delectable treats that are enjoyed by local residents. Like
many entrepreneurs, the Sweets have been ve1y focused on their business and have sacrificed much, including not planning
for their own retirement. However, Bob’s recent 55th birthday bash sparked their interest and focus on retirement and
retirement planning. They have come to you to assist themwith planning fortheirretirement and to assist them with
their family business.
They want their financial plan to be flexible enough to meet their goals. They believe they will benefit from
meeting with a CERTIFIED FINANCIAL PLANNER™ practitioner and arrived with the following information
for you to assist them in creating a plan to meet their financial goals.
Bob Sweet
Bob is 55 years old and is currently the president ofTruffle Times. He wasraised in the south as a member ofa large
family and learned to cook fromhismother, Lori, who cooked daily forthe entire family. He is currently in ve1y good
health, exercisesregularly and competesin local runs and sprint triathlons. Bob and Candi are hands on with both kids in
school, Cinnamon and Pepper, and have high hopesfortheir oldest child, Sam.
Candi Sweet
Candi is 45 years old and is currently the CTO (Chief Truffle Officer), in charge of all of the candies that are
created and sold. She wasraised in Seattle, but moved to New Orleansto attend culinary school. She spent two years
working withEmeril Lagasse atCommander’s Palace asthe pastry chef. She spent her childhood learning to cookfromher
grandmother,Betty,who ownedaverypopulardiner.Candiisalsoingoodhealthandlikestorun and cycle.
Cinnamon Sweet
Cinnamon (age 16) is a junior in high school. She works part time at Truffle Times, volunteers at Children’s
Hospital as a candy striper, and plays on the high school volleyball team. She is also an avid runner.
Pepper Sweet
Pepper (age 17) is a senior in high school and spends most of his time practicing with the baseball and football
teams as well as studying for his classes. He does not work at the family business, but he is interested in running
the business someday.
Sam Sweet
Sam (age 25) is a bright young man who graduated from college with a BA in History and a MS in History. He
is currently working at Truffle Times as a vice-president over supply chain management. In reality, this means
that he gets supplies for the kitchen and coordinates the boxes for shipping truffles. He has never had another
job but would like to run Truffle Times.
FINANCIAL GOALS & CONCERNS
Bob and Candi have expressed the following goals:
I. They would like to retire when Bob is age 60 with $250,000 of annual income in today’s dollars. They
expect Social Security will reduce what they need to save. For planning purposes, they plan on living
until Bob is age 100.
They want to pay for their children’s college education and expect Cinnamon and Pepper will attend
col- lege for 5 years each and will need about $60,000 per year in today’s dollars. They expect that the
cost of tuition will continue to increase at 6% per year, which has been the trend lately.
3. They want to purchase a 40-foot sailboat when they retire so they can sail around the world. They
expect they will purchase a boat that is about $300,000 in today’s dollars. They expect that the cost of
the boat will increase at the general rate of inflation. This acquisition will increase their annual
operating costs, but any increase should be covered in the $250,000 of annual income needs.
4. They want to decide what to do with Truffle Times in terms of transferring it or selling it. They are
certainly open to discussing other alternatives.
5. They would like to figure out how to reduce their income tax burden.
EXTERNAL INFORMATION
ECONOMIC INFORMATION
• General inflation (CPI) is expected to be 3% annually.
• Education inflation is expected to be 6% annually.
• They live in the state ofTexaswhich has no state income tax.
• Raises are uncertain butin the longrun are expected to be equalto generalinflation (CPI).
• Theeconomyisinaslowgrowthrecoveryfromarecessionwithmoderate tohighunemployment.
BANK LENDING RATES
• Mortgage30years-conformingrate=4.0%
• Mortgage15years-conformingrate=3.75%
• Any closing costs associated with mortgage refinancing are an additional 3% ofthe amount mortgaged.
INVESTMENT RETURN EXPECTATIONS
The Sweet’s required rate of return is 8%.
Expected
Return
Standard
Deviation
Cash and Money Market Fund 2.5% 2.0%
Treasury Bonds/ Bond Funds 4% 4.0%
Corporate Bonds/ Bond Funds 6% 5.0%
International BondFunds 7% 6.0%
Index Fund 9% 14.0%
Large Cap Funds/Stocks 10% 16.0%
Mid/Small Funds/Stocks 12% 18.0%
International Stock Funds 13% 22..0%
Real Estate Funds 8% 12.0%
EXTERNAL INFORMATION
INTERNAL INFORMATION
FINANCIAL STATEMENTS
Statement of Financial Position
Bob & Candi Sweet
Balance Sheet as of January 1
Assets LIABILITIES AND NET WORTH
Current Assets Current Liabilities
JT Cash & Checking
JT Money Market
$15,000
$15,500
JT Principal Residence Mortgage
w Auto Loan
$9,129
$12,414
Total Current Assets $30,500 Total Current Liabilities $21,543
Investment Assets Long-Term Liabilities
H Brokerage Account
H IRA Rollover
w IRA Rollover
$0
$28,000
$23,000
JT Principal Residence Mortgage
w Auto Loan
Total Long-Term Liabilities
$533,924
$27,586
$561,510
JT Truffle Times (est.) $4,341,552
JT Case Value of Life Insurance $32,000
Total Investment Assets $4,424,552
Personal Use Assets Total Liabilities $583,053
JT Principal Residence (land $50,000) $600,000
H Porsche Cayanne $50,000
w Inflniti $45,000 Total Net Worth $404,090
JT Clothing, Furniture, Fixtures $100,000
Total Personal Use Assets $795,000
Total Assets $987,143 Total Liabilities & Net Worth $987,143
H = Husband (Sole Owner)
W = Wife (Sole Owner)
JT = Joint Tenancy with Survivorship Rights
Statement of Financial Position
Bob & Candi Sweet
Income Statement
Cash Inflows
Bob Salary & Bonus $250,000
Candi Salary $100,000
Distribution from Truffle Time to pay Taxes $125,000
Total Cash Inflows $475,000
Taxes
Federal Income Taxes Withheld – Bob $49,368
Federal Income Taxes Withheld – Candi $20,000
Federal Estimated Tax payments $125,000
Bob Social Security Taxes $11,511
Candi Social Security Taxes $7,650
Bob & Candi’s Additional Medicare Tax Withholding $450
Property tax Principal Residence $9,000
Total Taxes $222,979
Debt Payments
Principle Residence $36,074
Auto Loan (Infiniti) $14,821
Other $0
Total Debt Payments $50,895
Living Expenses
Utilities Principal Residence $6,000
Gasoline for Autos $2,400
Lawn Service $1,800
Entertainment $10,000
Vacations $10,000
Church Donations $3,000
Clothing $6,000
Auto Maintenance $0
Satellite TV $800
Food $6,500
Tuition for high school (both kids) $40,000
Total Living Expenses $86,500
Insurance Payments
HO Insurance Principal Residence $4,000
Auto Insurance Premiums $4,000
Life Insurance Premiums (Bob & Candi) $12,000
Liability Insurance $500
Total Insurance Payments $20,500
Total Cash Outflows $380,874
Net Discretionary Cash Flows $94,126
INSURANCE INFORMATION
Life Insurance
Bob has a whole life policy that he acquired while he worked in the corporate world. His former company paid
the premiums for the policy, but now he pays the premiums. The policy has a face value of $2 million and has
a monthly premium of $1,000. It currently has a cash value of $40,000. The crediting rate is 4%.
Candi has a term policy that is paid for by Truffle Times. It has a face value of $250,000 with an annual
premium of $400.
Health Insurance
Bob and Candi are covered under the Truffle Times health policy. They believe the policy is satisfactory in
every way regarding major medical, stop loss, etc.
Disability Insurance
Bob and Candi are covered under disability policies paid for by Truffle Times. The policies provide for a 90
day elimination period and provide benefits of 60% of gross pay up to age 65. The policies have an own
occupation definition and cover both accidents and sickness. The annual premiums are $1,500 for each policy
– $3,000 total.
OTHER INFORMATION REGARDING ASSETS AND LIABILITIES
Bob and Candi purchased new cars one year ago. Bob purchased a Porsche Cayenne and Candi purchased an
Infiniti. They decided they would have Truffle Times pay for Bob’s car since it is an SUV and can be used to
pick up supplies and make deliveries. Bob probably uses the car for actual business about 30 percent of the
time. Truffle Times owns another delivery van that is used for picking up supplies and is used exclusively for
the business. In addition, the van is painted with the Truffle Times logo, website and phonenumber.
Personal Residence
The Sweets purchased a new residence three years ago for $700,000 and financed 80 percent of the purchase
price at five percent for 30 years. Unfortunately, the value of the property has declined significantly due to the
housing market. It is currently worth less than what they owe on the property.
CASE ASSUMPTIONS
1. Bob’s Social Security retirement benefit at normal retirement age of67 is $2,500 per month in today’s
dollars.
2. Candi’s Social Security retirement benefit at normal retirement age of67 is $1,666.67 per month in
today’s dollars.
3. They borrowed $40,000 to purchase the Infinity at 7 percent for 36 months. Their monthly payment
is $1,235.08.