You are a CFP® professional and have met with Alix and Eddy Pereira, who have come to you for help with several financial planning goals. Alix and Eddy own a computer software company: E & A, LLC. Alix is 32 years old, and Eddy is 37 years old. They are happily married and have two children: Tomas (age 5) and Maya (age 3).

All family members are in good health, and the family has no history of serious health issues. Based on these facts, along with their family health histories, Alix and Eddy each expect to live to be 90 years old. Alix and Eddy have completed a risk tolerance questionnaire, which indicates that they have a high tolerance for risk. They would like their portfolio and investment decisions to be based on their expected wealth, their desire for security, the funding levels that they are trying to achieve, and the likelihood of achieving those funding levels. They have also told you that they usually agree when it comes to financial matters; however, in your initial meetings you have noticed a couple of areas of conflict:

•  They occasionally disagree about financial wants versus needs.

•  Eddy has indicated that he is often inclined to sell an investment immediately if they suffer a

  loss and move that money into an investment that has recently performed well. Alix prefers to hold on to the investment and tends to focus more on the fact that it has performed well in the past.

  Budgeting

  Eddy and Alix have asked you to assess their overall financial health based on an analysis of their financial statements. They would like you to identify opportunities for improvement, as well as potential problem areas in their budget. They would also like you to recommend realistic changes that they can make to improve their overall financial health and to address any problem areas that you identify. They have asked that your budget recommendations include an explanation of the advantages and disadvantages of refinancing the existing 30-year mortgage to a 15-year mortgage with a slightly lower interest rate. They are not asking for a specific recommendation; however, they wish to understand the pros and cons.

  Goal Setting

  Alix and Eddy have asked you to help them identify and prioritize specific financial planning goals based on their financial statements and the qualitative information that you have gathered.

  Retirement Planning

  Alix and Eddy would like to continue to run their business until Alix turns 62, at which time the couple would like to sell the company and retire. They anticipate that the business will continue to generate the same amount of income each year, that their personal expenses will remain constant until retirement, and that they will net $5 million from the sale of the business when they retire. Based on an analysis of current expenses on their income statement along with their expected spending in retirement, Alix and Eddy anticipate that their annual personal expenses in retirement will be 80% of their total annual expenses today. You have mutually agreed to base your retirement planning recommendations on this assumption.

Alix and Eddy have asked you to determine the following, which will require you to assume an annual inflation rate and an average annual return on investment:

•  How much they will need to have saved for their retirement in 30 years—in addition to their current assets, their annual Social Security benefits, and the sale of their business—to have sufficient funds to meet their income needs in retirement

•  Their required annual savings to achieve this funding
  Your report to the Pereiras should include an explanation of how you arrived at the assumed inflation

  rate, citing your source(s) of information.

  Alix and Eddy have also asked for specific retirement savings and investment vehicle recommendations. These recommendations should include the following:

•  An explanation of the tax implications of the retirement savings vehicle alternatives

•  Investment recommendation(s) that align with their tolerance and capacity for risk

•  An explanation of how you determined the assumed rate of investment return. The assumed

  rate of return should be based on your investment recommendation(s) and should be used in the retirement funding and annual savings calculations that you perform.

  Education Planning

  The couple plans to send both Tomas and Maya to Ivy League colleges and expect college expenses to be $50,000 per year (in today’s dollars) for each child, for four years of school. The $100,000 in current education savings is in a money market account. They wish to keep the current assets in the money market account to avoid exposure to market risk. As a result, they are assuming no rate of growth on the current assets. The couple would like to take advantage of any gifting opportunities for their children.

  Alix and Eddy have asked you to determine the following, which will require you to assume an annual tuition inflation rate and an average annual return on investment:

•  The total amount that they must save, in addition to the $100,000 in current education savings, by the time Tomas enters college to have sufficient funds to cover educational expenses for both children

•  Their required annual savings to achieve this funding
  Your report to the Pereiras should include an explanation of how you arrived at the assumed tuition

  inflation rate, citing your source(s) of information.

  Alix and Eddy have also asked for specific education savings and investment vehicle recommendations. These recommendations should include the following:

•  An explanation of the tax implications of the education savings vehicle alternatives

•  Investment recommendation(s) that align with their tolerance and capacity for risk

•  An explanation of how you determined the assumed rate of investment return. The assumed

  rate of return should be based on your investment recommendation(s) and should be used in the education funding and annual savings calculations that you perform.

Tax Planning

Alix and Eddy have also asked about tax reduction opportunities. In addition to taking advantage of tax-advantaged vehicles for their retirement and for education savings and gifting opportunities for their children’s education funding, they are interested in understanding the following:

Is an LLC the appropriate legal structure for their business as it relates to income taxes? What are the potential tax benefits of charitable contributions?
Should they be concerned about being subject to the alternative minimum tax (AMT)? What steps can they take to avoid triggering the AMT?

Economic and Market Trends

Alix and Eddy have asked you to incorporate the following into your analysis:

•  Potential changes that may occur within their expenses as they age into retirement

•  An explanation of the impact of a 20% rise in expenses on their ability to save for retirement

  assuming everything else remains constant

•  The impact of an unexpected monthly healthcare cost of $10,000 on the Pererias’ retirement

  funding goal. What new rate of return on investment will be required for Alix and Eddy to meet

  their retirement funding goal if they do not increase their annual savings?

•  The impact of stock market underperformance on their savings and investments regarding

  retirement income. If the annual rate of return on investment is 1.5% less than your assumed

  rate of return, how will this affect Pereiras’ required annual savings for retirement?

•  The impact of tax law changes resulting in a 5% increase to the Pereiras’ effective tax rate

  Summary

  Your final report to the Pereiras should include a one-page conclusion section that incorporates the following:

•  A summary of the key needs/objectives of the client

•  Actionable recommendations for addressing the client's needs/objectives

•  A summary and explanation of your assumptions

Financial Statements

Balance Sheet

Assets

Savings (cash/money markets) Educational savings

Rental property

Personal property

Credit cards Home mortgage

Total liabilities

E & A, LLC income

Rental income

Car loan payments

LOC payments

Entertainment

Home insurance Health insurance

Rental property insurance

Income taxes (effective rate: 26%)

Net Income

$350,000 $100,000

$500,000

$250,000

$75,000 $1,000,000

$1,300,000

$2,000,000

$24,000

$18,000

$15,000

$65,000

$10,000 $12,000

$2,000

$149,240 $50,760

Investments (mutual funds)

$2,500,000

Home	$3,000,000

Autos

$200,000

Life insurance	$1,000,000
Total	$7,900,000
Liabilities

Car loans

$100,000

Personal line of credit

$125,000

Equity	$6,600,000
Total Liabilities and Equity	$7,900,000

Income Statement

Income

E & A, LLC expenses

$1,500,000

Investments	$50,000
Total Income	$574,000
Expenses
Credit card payments	$45,000

Mortgage payments

$60,000

Household

$80,000

Gasoline

$6,000

Home maintenance

$25,000

address each of the following in a minimum of 3–6 sentences:

1. Determine a client’s financial health using one or more established approaches to financial planning analysis and recommendations. Address the following in your response:
   1. Life cycle approach
   2. Pie chart approach
   3. Financial statement and ratio analysis approach
   4. Other
2. Determine how a client’s psychology might influence their financial behaviors. Address the following in your response:
   1. Financial motivations
   2. Risk tolerance
   3. Money beliefs
   4. Sources of money conflict
3. Identify a client’s specific financial planning goals. Address the following in your response:
   1. Short-term: Less than a year
   2. Intermediate-term: 2 to 10 years
   3. Long-term: Greater than 10 years
4. Describe the role of cognitive bias in relation to the case study presented. Address the following in your response:
   1. Potential cognitive biases of the client
   2. Potential cognitive biases of the planner
5. Evaluate opportunities for improving or addressing problem areas in the client’s budget. Address the following in your response and include any assumptions used in making your recommendations:
   1. Financing strategies
   2. Debt management
   3. Cash-flow management
      1. Income
      2. Expenses

Property taxes

$30,000

Rental property maintenance

$6,000

Total Expenses

$523,240