Instructions:

After reading the case facts below, use the assumptions that follow to provide the required

Case Facts

Randy and Mindy Smith have come to you for help in developing a plan to accomplish their financial goals. The Smiths 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. Today is December 31, 2023.

From their initial meeting together, you have gathered the following personal information:

• Randy Smith (Age 60) is a veterinarian and owns Meow's Medical Clinic, a local animal hospital with 25 employees. He has an annual salary of $250,000.
• Mindy Smith (Age 50) is in excellent health. She works as a bookkeeper for a local accounting firm, where she helps small businesses with their payroll and expenses. She has a daughter, Sullivan, from a previous marriage, who is age 29 and living on her own. Mindy has a salary of $50,000.
• They have been married for 25 years. They have three (3) children from their marriage:
  • Nicole - Age 23
  • Ryan - Age 21
  • Danielle - Age 12

Retirement Information:

• They anticipate retiring when Randy turns 67 and they both expect to live until age 95. They have estimated that they need $250,000 per year, in today's dollars, for retirement. This amount would drop by 25% if only one was alive.
• Randy
  • Randy wants to sell his business, Meow's Medical Clinic. He would like to do this in 2030 when he retires. He estimates his business is worth $2,250,000. The company is a C corporation with a basis of $25,000.
  • Randy has a traditional IRA with a balance of $1.35 million.
  • Randy also has a Roth IRA with a balance of $30,000. The account was established in 2000.
  • Mindy is the beneficiary on all of Randy's retirement accounts.
  • His social security at full retirement age (67) is $30,000 annually, in today's dollars.
• Mindy
  • Mindy has a 401(k) plan in which she is able to make elective deferrals of up to 20% of her salary. The accounting firm matches $.25 for each $1.00 she defers, up to 6% of her salary. She is vested in the 401(k) plan. The value is $150,000.
  • Randy is the beneficiary on all of Mindy's retirement accounts.
  • Her Social Security at full retirement age (67) is $24,000 annually, in today's dollars. She plans to take her Social Security at age 62.
  • Mindy was very close to her Aunt Rita who died last October. She bequeathed a Roth individual retirement account with a current FMV of $100,000. She opened the Roth IRA in 2003 and contributed $25,000 in regular contributions, and she converted $25,000 from a traditional IRA to a Roth IRA four years ag

Case Assumptions

• General inflation: 4% (current and future)
• Expected investment return: 9%
• Randy does not expect his salary to increase.
• Mindy's income will increase each year by 5%.
• Retirement period of 28 years for Randy and 38 years for Mindy

Case Requirements

1. Calculate the amount of capital needed to supplement Social Security benefits if they retire when Randy is age 67. (75 points)
2. Using the number, calculated above, how much money do they need to set aside at the end of each year, from now until retirement, to meet the retirement savings goal? Subtract existing savings for this calculation and assume all savings for this goal will be in a tax-deferred retirement account. (50 points)
3. Randy is considering starting a retirement plan for Meow's Medical Clinic. It has 25 employees. He would like to be able to contribute something to each of these employees' retirement, but he doesn't want to be responsible for the entire funding. He is also hesitant to add funds to his employees' accounts who are either part-time or have not worked for him for a period of time. He is not sure what this looks like and is seeking your recommendation. (70 points)
   • Which type of defined contribution plan should Randy consider for his company? Why? What are the advantages and disadvantages of the plan you are recommending?
   • If Randy takes your recommendation, how much money will he be able to put aside each year?

The professor provided a hint for Question 1.

Hint: For Question 1, it requires to calculate the amount of capital needed for retirement in 3 different periods.

Period 1: Randy 67, Mindy 57: Period where Randy is collecting social security and that is the only income. This is for 5 years before Mindy collects social security.

Period 2: Randy, 72, Mindy 62, Period where both are collecting social security. This period lasts for 23 years. They are going to live to 95. If Randy is 95 (95-72). Mindy will be 85. How much is Mindy's social security? Is she taking reduced benefits?

Period 3: Mindy alone. The inflated $250,000 figure drops by 25%. This period lasts for 10 years. How much is Mindy's social security? Will she continue on her own or assume Randy's amount as a widow?