1. Assume that Michelle is self-employed. What are her retirement plan options?

2. By using the annuity approach, calculate the capital needed at retirement (age 67) for the Williamses. Assume a 9% after-tax rate of return. Based on the calculation on Michael’s salary only.

3. By using the capital preservation approach, calculate the capital needed at retirement for the Williamses.

4. By using the purchasing power preservation approach, calculate the capital needed at retirement for the Williamses.

5. Explain the key differences between the three approaches in Questions 2-4.

6. Using the capital you computed in Question 2 to determine whether the Williamses will be able to retire at age 67 with their current annual savings. For current annual savings, use Michael’s Section 401(k) plan contribution plus the employer’s match and assume that Michelle saves all that she currently earns on an annual basis. Assume that all investment assets (regardless of how they are currently invested) will earn a 9% after-tax rate of return. Consider the checking account, market money account, and coin collection as non-retirement assets.

7. What changes, if any, would you recommend to the Williamses regarding their retirement planning?

8. If Michael and Michelle include the receipt of Social Security benefits in their retirement planning, could they retire at age 67 without increasing their annual savings? Assume that at age 67 (in today’s dollars) Michael’s Social Security benefit would be $29,820 and Michelle’s would be $14,910. Use Michael’s salary only.

9. If the Williamses choose to rely on Social Security benefits in their retirement planning, how much earlier than 67 can they retire? (Assume all other facts as given in Question 8)

10. Describe a Keogh (HR-10) plan and discuss the advantages and disadvantages in adopting this type of plan.

11. Describe a SEP IRA and discuss the advantages and disadvantages of adopting this type of plan.

12. Describe a SIMPLE IRA and discuss the advantages and disadvantages of adopting this type of plan.

13. Describe a SIMPLE 401(k) and discuss the advantages and disadvantages of adopting this type of plan.

14. Of the four plans discussed, which is the best fit for Michelle’s new business?

15. Other than child care costs and unreimbursed medical expenses, what expenses can Michael pay for with pre-tax dollars through his FSA?

  
 
 
 
 
 

Transcribed Image Text:

62 Personal Financial Planning Cases and Applications Textbook 7th Edition Michael and Michelle Williams believe they have a solid financial future; however, they are concerned about actions they need to take to ensure college educations for two of their children and a secure future for a third child with special needs. They have come to you for assistance in determining how they can achieve these goals. Today is January 1, 2011. Personal Background and Information Michael Williams (Age 35) Michael is a doctor who specializes in internal medicine. He is an employee of Lakeside Hospital. The salary that Michael earns compensates him for patients seen at both the hospital and the Lakeside-owned clinic. Michael is starting his sixth year of practice. He has been discouraged lately with the medical economic environment. Given the proliferation of managed care, he sees only a limited ability to increase his salary in the future and is concerned that his salary increases are not likely to exceed inflation. Michelle Williams (Age 35) Michelle grew up in a middle class family and lost both of her parents to cancer in their early 50s. Michelle is a nurse but has not worked in her profession since her children were born. Michelle is fascinated with all things technological. She is a seller on an online auction site. Michelle has an uncanny sense for shopping for unique items that she buys, adds a markup, and resells. She marks up an item 100%, does not sell the item for less than its marked-up price, and charges the online buyer for all related shipping costs. In 2011, she has changed the dynamic of her business and expects to generate up to $90,000 net income from the business this year. Children Michelle and Michael have three children: Beau (age 7), Lizabeth (age 5), and Madison (age 2). Madison has Down syndrome. Michael's Family Michael is an only child and has been his parents' pride and joy. Michael's parents (Frank and Isabelle) are first-generation immigrants from England. They immigrated before Michael was born and operate a small neighborhood deli. Michael and Michelle met at the deli when Michelle worked there during her college years. The ebb and flow of community life through the deli still fascinates Michelle, and she often visits Michael's parents there. The elder Williamses own the building (fair market value, $150,000) that houses the deli. The neighborhood has seen needed renovations in gry 62 Personal Financial Planning Cases and Applications Textbook 7th Edition Michael and Michelle Williams believe they have a solid financial future; however, they are concerned about actions they need to take to ensure college educations for two of their children and a secure future for a third child with special needs. They have come to you for assistance in determining how they can achieve these goals. Today is January 1, 2011. Personal Background and Information Michael Williams (Age 35) Michael is a doctor who specializes in internal medicine. He is an employee of Lakeside Hospital. The salary that Michael earns compensates him for patients seen at both the hospital and the Lakeside-owned clinic. Michael is starting his sixth year of practice. He has been discouraged lately with the medical economic environment. Given the proliferation of managed care, he sees only a limited ability to increase his salary in the future and is concerned that his salary increases are not likely to exceed inflation. Michelle Williams (Age 35) Michelle grew up in a middle class family and lost both of her parents to cancer in their early 50s. Michelle is a nurse but has not worked in her profession since her children were born. Michelle is fascinated with all things technological. She is a seller on an online auction site. Michelle has an uncanny sense for shopping for unique items that she buys, adds a markup, and resells. She marks up an item 100%, does not sell the item for less than its marked-up price, and charges the online buyer for all related shipping costs. In 2011, she has changed the dynamic of her business and expects to generate up to $90,000 net income from the business this year. Children Michelle and Michael have three children: Beau (age 7), Lizabeth (age 5), and Madison (age 2). Madison has Down syndrome. Michael's Family Michael is an only child and has been his parents' pride and joy. Michael's parents (Frank and Isabelle) are first-generation immigrants from England. They immigrated before Michael was born and operate a small neighborhood deli. Michael and Michelle met at the deli when Michelle worked there during her college years. The ebb and flow of community life through the deli still fascinates Michelle, and she often visits Michael's parents there. The elder Williamses own the building (fair market value, $150,000) that houses the deli. The neighborhood has seen needed renovations in gry

Answer rating: 100% (QA)

1 As a selfemployed individual Michelle has several options available for setting up a retirement plan Some of these plans will also cover her employees Here are the most common options 1 Simplified E... View the full answer