Chapter 17, Problem 1FPC

Tom and Tina are updating their financial plan and are concerned that they might not have enough life insurance coverage for their family, which includes two children, ages 4 and 10. They have determined that their annual income is $70,000 and their net worth is now $150,000. What is the amount of life insurance they should carry using the easy method?

Amount of Insurance Needed. Peter is married and has two children. He wants to be sure that he has sufficient life insurance to take care of his family if he dies.​ Peter's wife is a homemaker but attends college​ part-time pursuing a law degree. It will cost approximately ​$40,000 for her to finish her education. Because the children are​ teenagers, Peter feels he will only need to provide the family with income for the next ten years. He further calculates that the household expenses run approximately ​$61,600 per year excluding the mortgage payments. The balance on the home mortgage is $ 125,000. Peter set up a college fund for his children when they were​ babies, and it currently contains sufficient funds for them to attend college. Assuming that​ Peter's wife can invest the insurance proceeds at 9​%, calculate the amount of insurance Peter needs to purchase. The amount of life insurance Peter would need to purchase is?

Your client is Lisa, aged 63. Lisa’s husband looked after all of the couple’s finances and Lisa is now struggling to know how best to manage the finances since her husband died earlier this year. Lisa has 3 children aged 23, 17 and 15. Her husband has left a superannuation balance amounting to $600 000 consisting of a $150 000 tax-free component. Lisa is a relatively low risk investor and thinks that the security of a regular income stream sounds very appealing. 1. What advice can you provide Lisa with respect to longevity risk? Given her circumstances how is she likely to be affected by longevity risk? Given life tables, for how many years on average is Lisa likely to require an income stream? 2. What are the implications if part of the husband’s death benefit superannuation is distributed to their children? 3. Lisa is concerned that she does not have the skills to manage the investment decisions associated with the $600,000 superannuation death benefit. Does this effectively rule out…

The expenses associated with sending two children through college prevented Victor and Maria Hernandez from adding substantially to their investment program. Now that their younger son, Joseph, has completed school and is working full time. They would like to build up their investments quickly. Victor is 47 years old and wants to retire early, perhaps by age 60. In addition to the retirement program at his place of employment, Victor believes that their investment portfolio, currently valued at $115,000, will need to triple to $345,000 by his planned retirement time, in 13 years. He and Maria realize that they will have to sacrifice a lot of current spending to save and invest for retirement. What rate of return is needed on the $115,000 portfolio to reach their goal of $345,000 (assuming no additional contributions)? Use Appendix A-1 or visit the Garman/Forgue companion website. Round your answer to the nearest whole number. Round ‘Future Value of a Single Amount’ in intermediate…

Like many married couples, Morgan and Thomas Jensen are trying their best to save for two important investment objectives: (1) an education fund to put their two children through college; and (2) a retirement nest egg for themselves. They want to set aside $100,000 per child by the time each one starts college. Given that their children are now 10 and 12 years old, Morgan and Thomas have 6 years remaining for one child and 8 for the other. As far as their retirement plans are concerned, the Jensens both hope to retire in 20 years, when they reach age 65. Both Morgan and Thomas work, and together, they currently earn about $90,000 a year. The Jensens started a college fund some years ago by investing $6,000 a year in bank CDs. That fund is now worth $67,000 (assume that the fund is split in half for each child). They also have $52,000 that they received from an inheritance invested in several mutual funds and another $22,000 in a tax-sheltered retirement account. Morgan and Thomas…

Karen has been moonlighting as a life coach. This year she made over $65,000 and would like to not realize some of those earnings, maybe in a retirement account. However, she already contributes $6,000 to her qualified retirement plan at her regular employer. What can she do? A : She can contribute some of the $65,000 in a Keogh plan, if she stops participating in her employer’s plan.  B : She can contribute some of the $65,000 in an employee stock ownership plan.  C : She can contribute some of the $65,000 in a Keogh plan.  D : She cannot do anything because she has a qualified retirement plan available at her employer.

to help George and Jude Sullivan determine how much they need to retire early in about 20 years. Both have promising careers, and both make good money.  As a result, they’re willing to put aside whatever is necessary to achieve a comfortable lifestyle in retirement. Their current level of household expenditures (excluding savings) is around $75,000 a year, and they expect to spend even more in retirement; they think they’ll need about 125 percent of that amount. (Note: 125 percent equals a multiplier factor of 1.25.)  They estimate that their Social Security benefits will amount to $20,000 a year in today’s dollars and that they’ll receive another $35,000 annually from their company pension plans.  George and Jude feel that future inflation will amount to about 3 percent a year, and they think they’ll be able to earn about 6 percent on their investments before retirement and about 4 percent afterward. Find out how big their investment nest egg will have to be and how much they’ll have…

Rudabeh, 34, and​ Donovan, 31, want to buy their first home. Their current combined net income is ​$66 comma 00066,000 and they have two auto loans totaling ​$34 comma 00034,000. They have saved approximately ​$10 comma 00010,000 for the purchase of their home and have total assets worth $ 56 comma 000$56,000​, which are mostly savings for retirement. Donovan has always been cautious about spending large amounts of​ money, but Rudabeh really likes the idea of owning their own home although she​ hasn't expressed her preference to Donovan. They do not have a​ budget, but they do keep track of their​ expenses, which amounted to $ 58 comma 000$58,000 last​ year, including taxes. They pay off all credit card bills on a monthly basis and do not have any other debt or loans outstanding. Other than​ that, they do not spend a great deal of time tracking their finances. a. What financial statements should Rudabeh and Donovan prepare to begin realizing their home purchase​ goal? What records…

A client needs assistance with retirement planning. Here are the facts:  The client, Dave, is 21 years old. He wants to retire at 65.  Dave has disposable income of $2,000 per month.  The IRA Dave has chosen has an average annual return of 8%.  Question 1. If Dave contributes half of his disposable income to the account, what will it be worth at 65? Question 2. How much would he need to contribute to have $5,000,000 at 65?