Financial Planning Case Facts

Sheldon and Amy Cooper
Sheldon and Amy Cooper have come to you, a financial planner, for help in developing a plan to
accomplish their financial goals. The Coopers realize they have not done the best job managing
their finances and keeping records and have decided to seek professional advice. You have
explained the financial planning process to them, and as a result, they have asked that your
plan include the next step to further consider or implement your various recommendations and
ideas. Assume today is January 1, 2020.
Personal Background and Information
Sheldon Cooper (Age 37)
Sheldon is the owner and manager of Big Joey’s Bar and Grill (Big Joey’s), a small neighborhood
bar that is open Monday through Saturday from 4:00 pm to midnight and closed on Sundays.
Sheldon inherited the bar four years ago from his uncle Joey. Although academically capable,
Sheldon briefly attended State University but did not graduate, choosing instead to work
alongside his uncle. Sheldon has always had an entrepreneurial spirit, and he likes owning the
bar and carrying on his uncle’s legacy. Joey was a star running back on the State University
football team. Big Joey’s is somewhat of an institution among State University students and also
quite popular among local residents.
Amy Cooper (Age 37)
Amy works as an elementary school educator at Anytown Private Elementary School, located a
few blocks from the Coopers’ home. She has been employed by the school for 15 years. She
graduated from State University and met Sheldon at Big Joey’s during her senior year.
Sheldon and Amy have been married for 11 years. They both plan to retire in 25 years. They
have three children and do not plan on having any more.
Children Bradley, age 10, attends Anytown Private Elementary School and is in the fourth grade.
Brea, age 5, also attends Anytown Private Elementary School and is in kindergarten on a halfday schedule. Brea spends Monday through Friday afternoons during the school year at an
excellent day care center owned and operated by good friends of the Coopers. The center also offers an academic enrichment program for the children.
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Anytown Private Elementary School provides a 50% tuition discount for enrolled students who
are children of faculty and staff members of the school. Blaire, age 2, attends the same day care center as Brea nine hours a day, Monday through Friday, and also benefits from the enrichment program for her age group. The cost of the day care for Brea and Blaire is paid by the couple, but Brea is receiving additional instruction in French. The additional cost of $200 per month for Sara’s French class was paid for by Amy’s aunt, Belle, who was a strong proponent of children learning foreign languages, until her death. The Coopers were close to Aunt Belle, naming the children with names beginning with the letter “B” as a tribute to her. When she died last October, she bequeathed the following to her great-nieces and great- nephew:
• Bradley—Municipal bonds that had an FMV of $50,000 at Aunt Belle’s death and a basis to Aunt Belle of $20,000
• Brea—Preferred stocks that had an FMV of $48,000 at Aunt Belle’s death and a basis to Aunt Belle of $10,000
• Blaire—A nonqualified, single premium tax-deferred annuity, which Aunt Belle purchased for$10,000 20 years ago and which had an FMV at her death of $40,000 Amy has asked you what lump-sum would need to be invested today to fund the children’s future college costs. She asked you to assume each child will begin college at age 18 and graduate in four years. Assume current costs are $23,000 per year and are expected to increase by 4% per year. Any inherited funds will not be considered for college funding at this time. The Coopers would like you to use the 7% investment return assumption that is referenced under
Investment Data for this goal. They would also like you to assume all funds will be invested in a Section 529 plan.
Grandparents
Sheldon’s mother, Doreen, age 62, was widowed four years ago when her husband died at age
60. Her living expenses total $1,100 per month, and her only income is $600 a month from Social Security and $500 a month from Sheldon and Amy. Doreen has a partnership long-term care policy that she purchased 10 years ago. The policy had a maximum coverage amount of $100,000, which grew to $125,000 with its inflation protection rider. The policy includes provisions for both nursing home care and home health care. The Coopers assume they will need to assume responsibility for the premium payments in the near future. Sheldon has been concerned about several aspects of his mother’s health and has asked
3 how her developing health issues relate to making a claim on her long-term care insurance policy. He mentioned his mother is developing macular degeneration in her eyes, and he wants to know what percentage of her sight she must lose as a qualifying medical condition under long-term care insurance. Amy’s mother, Roberta, age 70, is a lifelong resident and citizen of Brazil and is fully supported
by Amy and Sheldon. The Coopers contribute $300 each month to support Roberta.
Economic Information
The Coopers expect inflation to average 2% annually, both currently and for the long term. They
also expect Amy’s salary to increase 5% annually, both currently and long term. The net income from Big Joey’s for the last three years was $76,000, $59,600, and $57,500, respectively. Sheldon expects net income from Big Joey’s to increase at 3.5% annually, both currently and over the long term.
Current mortgage rates are 3.5% for 15 years and 4.125% for 30 years. Closing costs would be
3% of the amount financed and would be paid at closing from separate funds (not rolled into
the mortgage).
Current Mortgage Rates
Term Type Rate 15-year fixed 3.500% 30-year fixed 4.125% 10/1 adjustable 3.250% 5/1 adjustable 2.750%
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Insurance Information
Life Insurance
Policy 1 Policy 2 Insured Amy Sheldon Policy provided through Employer State Lake Face amount $50,000 $150,000 Type Term (group) Whole life Cash value $0 $21,250 Annual premium $102 (employer paid) $2,361 Beneficiary Sheldon Amy Contingent beneficiary Three children None Policyowner Amy Sheldon Settlement options None Life annuity
Amy also has an accidental death and dismemberment policy through her employer. She is
covered for $100,000 under this policy. She pays a premium of $68 per year for this coverage.
Health Insurance
All family members are covered under a group health plan maintained by Amy’s employer. The
plan is a major medical policy with an annual family deductible of $500. After the deductible is
met, the plan pays 80% of the next $10,000 of covered medical expenses and 100% thereafter
for the balance of the calendar year. Amy’s school district also offers a flexible spending
account (FSA) for health and child care expenses, but Amy has never contributed. She has asked you to explain how an FSA works and what the benefit of participation would be to their finances. She has asked you to calculate any tax savings they would derive.
Dental Insurance
Sheldon, Amy, and the children have dental insurance offered through Amy’s employer. The
premium is $416 annually.
Disability Insurance
Sheldon has a personal disability policy with an own-occupation definition that provides a
benefit of $2,000 per month disability income and has a 180-day elimination period. The policy
was purchased from a local insurance agency. This policy covers both accidents and sickness
and has a benefit period of five years. Sheldon’s annual premium is $600.
5 Amy has an own-occupation policy that provides a benefit of 65% of gross pay and has a 90-day elimination period. The policy covers both accidents and sickness until age 65. The annual premium is $1,000. The premium is paid entirely by her employer as an employee benefit. She has the option to receive a higher benefit by paying the premium for the increase.
Homeowners Insurance
The Coopers have an HO-3 policy with a $250 deductible, a dwelling coverage of $97,000, an
80% coinsurance requirement, and a current yearly premium of $1,239. There is $100,000
liability coverage per occurrence.
Automobile Insurance The Coopers own one vehicle and lease another. They carry the same automobile coverage on both.
Insurance on Both Cars Type Personal auto policy Liability $100,000/$300,000/$50,000 Medical payments $5,000 per person Physical damage, own car Actual cash value Uninsured motorist $50,000/accident Collision deductible $100 Comprehensive deductible $250 Premium (per year) $2,180
Investment Data
NOTE: In the investment holdings tables in this section, the X with a line above represents the
average return for the holding. The Coopers indicate their tolerance for investment risk is a 7 on a scale of 1 to 10 (1 being the most risk averse). They expect to be more conservative as they get closer to retirement. For all of their financial planning goals, they are comfortable assuming a projected annual return of 7% on their investments and retirement assets. The risk-free rate is 2.5%, and the market rate of return (benchmark return) is 12.41%.
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Stocks
Shares Stock 𝑋 ̅ 𝛽 𝜎 𝑅2 𝑃/𝐸 Dividend Yield Basis Fair Market Value
400 A 6% 1.25 11% 85% 26.74 3.0% $8,000 $11,000
100 B 15% 0.85 9% 65% 16.52 0.7% $3,000 $6,100
1000 C -5% 2.55 15% 50% N/A N/A $2,000 $1,700
Total $18,800
Mutual Funds
Shares Fund Style 𝑋 ̅ alpha 𝛽 𝜎 𝑅2 Front-End
Load
Expense
Ratio
Basis
Fair Market
Value
112 A LB 13% 0.59% 1.02 10% 98% 0% 0.14% $1,500 $2,625
246 B SG 11% -1.41% 1.09 12% 70% 0% 0.07% $4,200 $5,100
143 C LB 12% -0.41% 0.89 13% 83% 0% 1.22% $4,000 $5,875
Total $13,600
Mia’s Section 403(b) Plan (TSA)
Shares Fund Style 𝑋 ̅ alpha 𝛽 𝜎 𝑅2 FrontEnd Load
Expense
Ratio
NAV
Fair Market
Value
2696 TSA LG 11.5% -0.91% 1.43 9% 94% 0% 1.00% 11.60 $31,331
Total $31,331 Amy has asked you to comment on her TSA plan performance. Specifically, she wants to know how well the fund is performing relative to what is expected using CAPM. Also, she is concerned that the fund may not be performing well enough to justify the portfolio’s risk, as measured by beta. Therefore, she wants you to analyze the portfolio’s risk versus the overall market. She also has asked what maximum contribution she can make to the plan for 2020.
Sheldon’s IRA
Shares Stock 𝑋 ̅ 𝛽 𝜎 𝑃/𝐸 Dividend Yield Basis Fair Market Value
440 D 6.7% 1.06 5% 28.45 3.8% $7,900 $10,340
170 E 13.6% 1.81 9% 13.42 3.0% $2,200 $12,200
66 F 7.2% 1.10 7% 18.11 2.5% $6,000 $5,402
Total $27,942
7 Sheldon wants to make a $4,000 contribution to his IRA. He wants to purchase Stock G using the entire contribution. The stock has an expected rate of return of 8% over the next five years. He would like to know the expected rate of return of the new portfolio, including this stock (Stock G), if his existing holdings continue to perform at a rate equal to their average rate of return. Also, will this new portfolio return exceed the rate of return he wants to assume for planning purposes, as stated in the Investment Data section of the case?
Income Tax Information Their marginal income tax rate is currently 22% for federal income taxes. There is no state income tax in the Coopers’ state of residence. Sheldon and Amy file their income tax return as MFJ, but they have never hired a professional to complete their income tax returns. They admit they are not the best record keepers and typically procrastinate, and then have to rush to file on time.
Retirement Information The Coopers plan to retire in 25 years, when they are 62 years old. They would like to have a retirement income equal to 80% of their preretirement income, in today’s dollars, adjusted for expected compensation increases as stated to age 62. For planning purposes, the Coopers wish
to assume they each will receive $25,000 per year at FRA from Social Security. They assume
they can earn 7% per year on invested retirement assets. They expect to be in retirement for 25 years. They want to know what amount of capital will be necessary to accumulate to supplement their assumed Social Security benefits, starting at age 62. Assume all savings for this goal will be in a tax-deferred retirement account. Do not subtract existing savings in this calculation, as at this time they simply are interested in the sum total. Amy has a Section 403(b) plan through Anytown Private School District. She has been
contributing 5% of her salary since she began working there 15 years ago. The school district
matches 25% of Amy’s contributions, up to an employer maximum contribution of 2% of salary.
Her estate is currently designated as the beneficiary. Amy also is a participant in a state teacher
retirement plan, but she does not wish to consider the plan in their retirement estimates.
Sheldon has an IRA through his bank. He opened the account 10 years ago and has been
contributing $3,000 each year since 2010. Before 2010, he contributed $2,000 annually. He
always contributes on January 1 of the year in question. His estate is the beneficiary of the IRA.
Sheldon would like to start maximizing his retirement savings. He has heard he may be able to
contribute more for retirement if Big Joey’s establishes an employer-sponsored retirement
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plan. Based on research he has done thus far, Sheldon has narrowed his choices for a
retirement plan for Big Joey’s to a SIMPLE IRA or a SEP IRA.
Gifts, Estates, Trusts, and Will Information
The Coopers have not done much estate planning and currently have simple wills leaving all
probate assets to each other.
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STATEMENT OF ANNUAL CASH FLOWS
Sheldon and Amy Cooper
For the year ending December 31, 2019 (and projected for 2020)
INFLOWS
Sheldon’s net income – Big Joey’s (Schedule C) $ 76,000
Amy’s salary 57,200
Dividend income 777
Checking interest income 130
Savings interest income 400
Certificate of deposit 275
Rental property income (Schedule E) $ 22,000
Total inflows $ 156,782
OUTFLOWS
Planned savings
Amy’s Section 403(b) plan $ 2,860
Sheldon’s IRA 3000
Total planned savings $ 5,860
Ordinary living expenses
Mortgage (principal and interest) $ 10,267
Homeowners insurance premium 1,239
Church donations – cash 6,000
Auto lease 4,000
Auto loan principal and interest 7,800
Gas/oil/maintenance 2,400
Auto insurance payments (both cars) 2,180
Credit card payments 6,200
Federal income tax and FICA 19,931
Property taxes on residence 2,657
Utilities 2,400
Telephone 1,600
Life insurance premiums (Sheldon) 2,361
Accidental death and dismemberment 68
Parental support 9,600
Health insurance 4,592
Dental insurance 416
Child care paid to day care provider 4,500
Private school tuition 12,000
Disability income insurance premiums (both) 1,600
Vacation expense 6,000
Entertainment expense 3,250
Food 6,250
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Clothing 5,000
Rental property expenses (Schedule E) $ 22,000
Total ordinary living expenses $ 144,311
Total outflows $ 150,171
Net cash flow surplus $ 6,611
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STATEMENT OF FINANCIAL POSITION
Sheldon and Amy Cooper
January 1, 2020
Assets
Cash/cash equivalent
Checking account JT $ 5,200
Savings account JT 12,300
Total cash/cash equivalent $ 17,500
Invested assets
Certificate of deposit JT $ 5,000
Savings bonds JT 4,000
Mutual funds JT 13,600
Individual stocks JT 18,800
Amy’s inherited IRA Amy 100,000
Amy’s Section 403(b) Amy 31,331
Sheldon’s IRA Sheldon 27,942
Big Joey’s JT 138,000
Rental property Amy 84,000
Life insurance cash value Sheldon 21,250
Total invested assets $ 443,923
Personal use assets
Primary residence (including land) JT $ 125,000
Jewelry Amy 8,000
Jeep Grand Cherokee JT 24,000
Baseball card collection Sheldon 2,400
Total personal use assets $ 159,400
Total assets $ 620,823
Liabilities
Credit cards $ 8,200
Auto loan 11,000
Home mortgage 98,836
Total liabilities $ 118,036
Net worth $ 502,787
Total liabilities and net worth $ 620,823
Replacement value of house is $115,000
Ownership: JT – JTWROS property; other wise, owned by individual listed.
12 The couple wants to become more knowledgeable about financial statements and reports and have asked you to explain how the following transactions in the upcoming year would impact their net worth:
• They pay off $5,000 of their credit card debt using the money from their savings account.
• Their mutual fund portfolio increases by7%.
• Sheldon buys $1,000 of sports memorabilia for $800 using funds from their checking account.
• Amy buys a used sports car for $25,000 with no down payment and financing at 3.9% for 60 months on the balance.
Notes Regarding Assets and Liabilities
Big Joey’s Big Joey’s is located one block off the local college campus and has been in business for 32 years. Joey had a tax basis in the bar of $10,000. The fair market value at the time of Joey’s death was listed at $40,000. Sheldon believes the value was an estimate by Joey but is not sure. Two years ago, Sheldon executed a legal document making Big Joey’s joint property with Amy. Sheldon has done some refurbishing of the bar at a cost of $30,000. The building and property are currently valued at $78,000. Sheldon states the bar (business and property) could be sold at a fair market value of $138,000 and thinks the value will increase at 3.5% per year. Big Joey’s is staffed primarily by students working part time a few hours a week, with none working more than 500 to 600 hours per year. Some students work a couple of years before graduating. Sheldon also employs a full-time grill cook and a full-time bar manager, each earning $35,000 per year. The fare is simple at Big Joey’s, but the students and locals love the charcoal grilled burgers, hot wings, and drink specials. Many locals have encouraged Sheldon to expand operating hours to include lunch service. In his later years, Joey only wanted to work evenings, and thus far, Sheldon has not changed the operating hours. When Sheldon inherited Big Joey’s, he also inherited a collection of sports memorabilia from the football program, mostly dealing with Joey’s time on the team.
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Residence The Coopers purchased their home six years ago and financed a mortgage of $104,000 over 30 years at 9.25%. The house is a two-story with three bedrooms and brick exterior. It has a pool and a large, open backyard.
Rental Property
The rental property, which is valued at $84,000, consists of a small retail building across town. It
is in a poor location and is currently a break-even proposition, as income equals expenses. Amy
acquired the property from Aunt Belle three years ago as a gift. Belle had a basis in the property
of $20,000 ($5,000 for the land and $15,000 for the building) and paid a gift tax of $24,000 on
the transfer. The annual exclusion was not available for this gift. At the time of the gift, the
property had a fair market value of $60,000. Belle died last December, and at the time of her death, the property was valued at $84,000. Amy has taken depreciation on the property in the amount of $4,308.
Before Belle’s death, Amy would never dispose of the rental property for fear of offending
Belle. However, now the Coopers are interested in selling the property and investing the
proceeds for retirement or for college funding. There is a tenant in the same strip mall who
would buy the property for $84,000.
Sheldon has also been approached by Ted, the owner of the building directly next to Big Joey’s,
offering to exchange his building for the Coopers’ rental property. Ted’s building has a current
fair market value of $100,000. Opening up the common interior wall of Ted’s adjoining building
would allow Sheldon to expand Big Joey’s and double the seating capacity. Remodeling the
space to convert to restaurant space would require an investment of approximately $75,000. In
the exchange, the Coopers would assume a small mortgage of $16,000. Sheldon is interested in acquiring Ted’s property.
Additional Development
Sheldon called you and said Ted was going to request information from you on the income and
expenses for the rental property. Due to several vacated spaces, the current information is not
as favorable as it was two years ago. Sheldon asked you to “help him out” by informing Ted that
the firm that does the accounting is running behind, and only the information from 2018 is
available to share (although 2019 is, in fact, available). This would be favorable to the Coopers,
but you wonder if complying with his request would violate any CFP Board principles or rules.
Please reference specific information contained in the Standards of Professional Conduct in
your response.

 

 

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