College Saving Plan - Essay Example

Financial Planning Case Study Question e Advice on college funding The goal of June and Ward Cleaver is to provide a 4 year college education for Theodore who is 4 years old at Harvard and a 4 year college education for Wally, 17 years at UMass-Boston. A 529 plan is a saving plan which is tax-advantaged and is designed in order to encourage saving for the future college costs. The Cleaver family has chosen to use this saving plan due to its college saving plan which is one of the two types of 529 plans. The college saving plan is aimed at saving for Wally who is 17 years and who is close to joining college. The college saving plan is very important as it will help the couple to establish an account for their child with the main aim of paying all the eligible college expenses. i. How much it will cost It is assumed that Wally who is 17 years old will join college at 18 years and this means that he only have one year to join college. He will also attend college for four years and full time basis. Since there are only four years, the parent will pay 100% of all the projected college costs and wish to meet all the savings goals by the time he completes the studies. The parents will make a monthly contribution towards their son’s college savings. The cost of college education is expected to increase by 3% annual which is the inflation rate. The couple also expects to earn a 9.65% after tax every year in the college saving fund. The current college cost is $25,000 per year. Based on this analysis, 100% of the total college cost will be $107,728which then means a monthly contribution of $2,122. ii. Whether to finance both children’s cost using 529 plans The couple wished to save for the college education of the two children. In this case, 529 plans can be used for the two children. The only difference between the saving for the two children is that the saving for Wally will start only a year to joining college while that of Theodore will start 14 years before he joins college-assuming that the two children will join college at the age of 18. The parents will also have to contribute less in terms of monthly pay for Theodore than for Wally. Based on the above assumptions, 100% of the total college costs for Theodore will be $158, 203 leading to a monthly contribution of $354 aimed at meeting this cost. http://www.savingforcollege.com/college-savings-calculator/index.php?current_cost=25000&years_until_college=14&years_attendance=4&attendance_rate=100&coverage_rate=100&save_until=ends&starting_balance=0&contribution_rate=12&inflation_rate=3&investment_performance=9.65&Submit=Submit&page=results iii. The best 529 plan Since Harvard and UMass-Boston are both based in Massachusetts State, the best 529 plan would be U.Fund College Investing Plan. This saving plan is managed by Fidelity and offers five different individual fund portfolios to choose from with each portfolio corresponding to the age of the beneficiary. It does not require any state residency. With this plan which is based in Massachusetts State, then it means that the savings for the college of the two children will well placed as the finances will be paid to their colleges. Question i Advice on retirement planning i. How much will be available for retirement June has a self employment income of $125,000 and self employment expenses of $25,000 which makes the self employment salary to be $100,000. To calculate the total amount which June should save before her retirement, we will assume that she will contribute to the plan for the next 25 years before he retires. The following are the assumptions towards the calculation of retirement saving for June: Current 401(k) balance $165,000 Current annual income $100,000 Expected increase in annual salary 0% Salary percentage held for 401 (k) 12.5% Employer match 0% Years to fund 401 (k) 25 Average annual interest rate 3% Based on these assumptions, June will have saved a total of $807,447.15 for her retirement. MyCalculators.com 401(k) Contribution Schedule  (2013) Fund 401(k) for 25 years Annual Income of $ 100,000.00- increasing 0% per year Beginning Balance= $ 165,000.00 Contribute 12.5% of Salary - Invested Monthly Your Employer will match 0% up to 0% of salary - Annually Annual Interest Rate = 3% - Compounded Annually Year # Beginning Balance You Contribute Employer Contributes Earnings Ending Balance 1 $ 165,000.00 $ 12,500.00 $ .0 $ 5,120.96 $ 182,620.96 2 $ 182,620.96 $ 12,500.00 $ .0 $ 5,649.59 $ 200,770.54 3 $ 200,770.54 $ 12,500.00 $ .0 $ 6,194.07 $ 219,464.62 4 $ 219,464.62 $ 12,500.00 $ .0 $ 6,754.90 $ 238,719.51 5 $ 238,719.51 $ 12,500.00 $ .0 $ 7,332.54 $ 258,552.06 6 $ 258,552.06 $ 12,500.00 $ .0 $ 7,927.52 $ 278,979.58 7 $ 278,979.58 $ 12,500.00 $ .0 $ 8,540.35 $ 300,019.92 8 $ 300,019.92 $ 12,500.00 $ .0 $ 9,171.56 $ 321,691.48 9 $ 321,691.48 $ 12,500.00 $ .0 $ 9,821.70 $ 344,013.18 10 $ 344,013.18 $ 12,500.00 $ .0 $ 10,491.35 $ 367,004.53 11 $ 367,004.53 $ 12,500.00 $ .0 $ 11,181.09 $ 390,685.63 12 $ 390,685.63 $ 12,500.00 $ .0 $ 11,891.53 $ 415,077.15 13 $ 415,077.15 $ 12,500.00 $ .0 $ 12,623.27 $ 440,200.43 14 $ 440,200.43 $ 12,500.00 $ .0 $ 13,376.97 $ 466,077.40 15 $ 466,077.40 $ 12,500.00 $ .0 $ 14,153.28 $ 492,730.68 16 $ 492,730.68 $ 12,500.00 $ .0 $ 14,952.88 $ 520,183.55 17 $ 520,183.55 $ 12,500.00 $ .0 $ 15,776.46 $ 548,460.02 18 $ 548,460.02 $ 12,500.00 $ .0 $ 16,624.76 $ 577,584.78 19 $ 577,584.78 $ 12,500.00 $ .0 $ 17,498.50 $ 607,583.28 20 $ 607,583.28 $ 12,500.00 $ .0 $ 18,398.46 $ 638,481.73 21 $ 638,481.73 $ 12,500.00 $ .0 $ 19,325.41 $ 670,307.14 22 $ 670,307.14 $ 12,500.00 $ .0 $ 20,280.17 $ 703,087.31 23 $ 703,087.31 $ 12,500.00 $ .0 $ 21,263.58 $ 736,850.89 24 $ 736,850.89 $ 12,500.00 $ .0 $ 22,276.48 $ 771,627.38 25 $ 771,627.38 $ 12,500.00 $ .0 $ 23,319.78 $ 807,447.15 Totals   $ 312,500.00 $ .0 $ 329,947.15   www.MyCalculators.com Copyright© 1997-2013 MyCalculators.com Source: http://www.mycalculators.com/ca/401k_pop.html Ward is employed and he earns an annual salary of $135,000 and annual withholding of $38,000 Federal and $8,000 to the state. This makes his gross annual salary to be $89,000. His current 401 (k) balance is $180,000. To calculate the amount of retirement savings for Ward, we will assume that he will contribute to the plan for the next 25 years before he retires. The following are the assumptions towards the calculation of retirement saving for June: Current 401(k) balance $180,000 Current annual income $89,000 Expected increase in annual salary 0% Salary percentage held for 401 (k) 12.5% Employer match 100% Frequency 6% Years to fund 401 (k) 25 Average annual interest rate 3% Based on these assumptions, June will have saved a total of $982,729.18 for her retirement. MyCalculators.com 401(k) Contribution Schedule  (2013) Fund 401(k) for 25 years Annual Income of $ 89,000.00- increasing 0% per year Beginning Balance= $ 180,000.00 Contribute 12.5% of Salary - Invested Monthly Your Employer will match 100% up to 6% of salary - Annually Annual Interest Rate = 3% - Compounded Annually Year # Beginning Balance You Contribute Employer Contributes Earnings Ending Balance 1 $ 180,000.00 $ 11,125.00 $ 5,340.00 $ 5,552.15 $ 202,017.15 2 $ 202,017.15 $ 11,125.00 $ 5,340.00 $ 6,212.67 $ 224,694.82 3 $ 224,694.82 $ 11,125.00 $ 5,340.00 $ 6,893.00 $ 248,052.82 4 $ 248,052.82 $ 11,125.00 $ 5,340.00 $ 7,593.74 $ 272,111.55 5 $ 272,111.55 $ 11,125.00 $ 5,340.00 $ 8,315.50 $ 296,892.05 6 $ 296,892.05 $ 11,125.00 $ 5,340.00 $ 9,058.91 $ 322,415.97 7 $ 322,415.97 $ 11,125.00 $ 5,340.00 $ 9,824.63 $ 348,705.60 8 $ 348,705.60 $ 11,125.00 $ 5,340.00 $ 10,613.32 $ 375,783.92 9 $ 375,783.92 $ 11,125.00 $ 5,340.00 $ 11,425.67 $ 403,674.59 10 $ 403,674.59 $ 11,125.00 $ 5,340.00 $ 12,262.39 $ 432,401.98 11 $ 432,401.98 $ 11,125.00 $ 5,340.00 $ 13,124.21 $ 461,991.19 12 $ 461,991.19 $ 11,125.00 $ 5,340.00 $ 14,011.89 $ 492,468.08 13 $ 492,468.08 $ 11,125.00 $ 5,340.00 $ 14,926.19 $ 523,859.27 14 $ 523,859.27 $ 11,125.00 $ 5,340.00 $ 15,867.93 $ 556,192.20 15 $ 556,192.20 $ 11,125.00 $ 5,340.00 $ 16,837.92 $ 589,495.12 16 $ 589,495.12 $ 11,125.00 $ 5,340.00 $ 17,837.01 $ 623,797.13 17 $ 623,797.13 $ 11,125.00 $ 5,340.00 $ 18,866.07 $ 659,128.19 18 $ 659,128.19 $ 11,125.00 $ 5,340.00 $ 19,926.00 $ 695,519.19 19 $ 695,519.19 $ 11,125.00 $ 5,340.00 $ 21,017.73 $ 733,001.92 20 $ 733,001.92 $ 11,125.00 $ 5,340.00 $ 22,142.21 $ 771,609.13 21 $ 771,609.13 $ 11,125.00 $ 5,340.00 $ 23,300.43 $ 811,374.56 22 $ 811,374.56 $ 11,125.00 $ 5,340.00 $ 24,493.39 $ 852,332.94 23 $ 852,332.94 $ 11,125.00 $ 5,340.00 $ 25,722.14 $ 894,520.09 24 $ 894,520.09 $ 11,125.00 $ 5,340.00 $ 26,987.75 $ 937,972.84 25 $ 937,972.84 $ 11,125.00 $ 5,340.00 $ 28,291.34 $ 982,729.18 Totals   $ 278,125.00 $ 133,500.00 $ 391,104.18   www.MyCalculators.com Copyright© 1997-2013 MyCalculators.com Source: http://www.mycalculators.com/ca/401k_pop.html The total money for the couple’s retirement will be a total of $1,790,176.33. i. Retirement age The couple plans to retire comfortably with the same level of current income to Hilton Head, S.C as soon as possible buying a home for $500,000. The total annual living expenses for the family is $123,000 and the couple’s current salaries is $260,000. With these calculations, the couple can retire sooner than the age of 65. The couple has a life expectancy of 90 years that is 25 years from the expected retirement age. Using the investment assumptions above, then the estimated monthly income for Ward at retirement will be $2,172 which translates to $26,064 per year. The estimated monthly income at retirement for June will be $ 3,687 which is equivalent to $44,244 per year. The couple will get a total of $70,308 per year as part of their retirement income. The same level of income as their current salaries will be reached after five years. That means that the couple can retire at the age of 45 years. http://www.calcxml.com/calculators/ret09?skn=#calcoutput http://money.msn.com/retirement/401k-calculator.aspx Question j Advice on life and disability insurance Death and disability are very painful for any family and should therefore be put into consideration during financial planning. The best life insurance is Whole life insurance due to the intrinsic values involved. The insurance lasts in perpetuity unless the policy owner stops paying for it. It also acts as and insurance in the case on untimely death and as an estate planning tolls when the final day comes. Long term disability insurance which starts from 31 days to until the death of the insured is the best insurance for the couple. To calculate the amount needed for the couple to include in the disability insurance, we will calculate the total monthly living expenses for the couple as follows: Source: http://www.rbcinsurance.com/healthinsurance/disability-insurance-calculator.html Based on the information provided by the couple, they will require $19,984 on disability insurance per month which should be included in their financial planning. Based upon all the financial projection provided by the couple, the amount needed for life insurance is $3,114,907.53. This amount depends on the number of children and their ages, the financial plan of the couple to purchase a home of $500, 000 after retirement, the amount of money required for burial, total income required by the survivors, whether the children will join college, the total costs of each children’s education, and the number of years the children will benefit from the plan. Question k Advice on estate planning Estate planning is the arrangement of how ones assets will be disposed upon your death. Estate planning is very important for the couple since they plan to purchase a home after retirement. The couple is also paying a mortgage which they took to purchase a property. The following are the property details of the couple: a) Real Estate Taxes: $10,000 b) Auto Property Tax: $500 c) Mortgage: $320,000 (original) d) home for $500,000 In planning for an estate, the couple should make an estate plan for nay untimely death. This is very important for the children. Failure to make an estate plan, the state will make an estate plan for you upon your death and in most cases, the plan may not be the one you ever wanted for your family. The assets which are titled under individual names should be probated to transfer then to the beneficiaries’ names upon your death. The couple should also make an estate plan for medical emergencies like slipping into a coma. This is very important and a must and should be included by signing two important legal documents called advance medical directive and living will. The estate planning should also include the minor children. The two children for June and Ward are under age and the estate planning should put them into consideration. This is done to avoid the control of the minor’s estate being taken over by the court or conservator. The couple also need to purchase a life insurance to act as a family financial security upon any premature death of the parents. The insurance proceeds could be used to pay for outstanding medical bills, credit card bills, outstanding mortgage, act as a replacement of the lost income and to pay for the education and care of the children. The couple should also consider a prenuptial agreement for each one of them to be involved in the business. This agreement protects the family assets and can protect ones spouse from any debts acquired. Everyone regardless of their age requires an estate plan as it gives instructions to the loved ones following the event of your untimely death. Income statement June & Ward Cleaver Income Statement Income Salaries 135,000 Self employment income 125,000 Total income 260,000 Expenditures for living expenses Clothing 25,000 Dependent care 5,000 Entertainment 17,000 Food 13,000 House maintenance 8,000 Liabilty insurance 300 Real estate taxes 10,000 Auto property tax 500 Utilities 12,000 Travel/vacation 20,000 Homeowners insurance 700 Car insurance 1,500 Car maintenance 3,000 other 1,000 Total expenditures 117,000 Expenditure for charity Charity 25,000 Total expenditures 142,000 Total income less expenses 118,000 June & Ward Cleaver Statement of Net Worth (Unaudited) ASSETS       4/012013 Investments   Taxable Accounts   "Perennial Dog" Stock: 40,000 Microsoft 100,000 Fidelity Capital & Income Fund $25,000 Total Taxable Accts 165,000   Retirement Accounts   June & Wards 401(k)   Wards Bond Fund 180,000 Junes Fidelity Fund 165,000 Total Retirement Accts 345,000 Total Investments 510,000   Other Assets (est.)   Checking Account 50,000 Furniture 30,000 Personal Residence 530,000 Automobile 30,000 Total Other Assets 640,000   TOTAL ASSETS 1,150,000   LIABILITIES   Self Employment Taxes 12,283 Income Taxes (est.) 11,001 AMT 27,219 Mortgage 271,011 Car Loan 20,653 TOTAL LIABILITIES 342,165   NET WORTH $807,835 Works Cited Koh, B. Personal Financial Planning. FT Press, 2012, pg 50-150 Read More