Student name:Diva’ Elion
Comprehensive Case Assignment #1
You have to do formulas for each step of the answer
Case 3 “Sharon Laynee”
Must upload back as excel file – no PDFs.
1. Calculate the cost of Lucy’s care
Sharon estimates that Lucy’s funds will be depleted in 10 years (as of 2027), which will be 10 years p
life expectancy. Lucy’s care is $60,000 per year in today’s dollars, increasing at 3%. Sharon estimate
value of the fund needed to care for Lucy is $285,362. She will deposit $43,491
for 10 years to create the needed funds.
Step 1 – get PV of payments
the interest rate per period
total number of periods in investment
payment made each period
future value
present value
rate
nper
pmt
fv
pv
0.053398
10
($59,999.99)
$0.00
$455,753
do formula here
Step 2 – get PV of the fund needed to care for Lucy
the interest rate per period
rate
total number of periods in investment
nper
payment made each period
pmt
future value
fv
present value
pv
0.053398
9
$0
$455,753
$285,362
do formula here
Step 3 – amount she will need to deposit for 10 years
the interest rate per period
rate
total number of periods in investment
nper
future value
fv
present value
pv
$
payment made each period
pmt
8.5
10
$0
285,362
$43,491
do formula here
2. Calculate the cost of Allison’s education
Sharon wants to create an education fund for Allison so she can go to 4 years of college at a private
Tuition is $30,000 per year in today’s dollars and is expected to increase at 6% per year until Allison
begins her studies in 15 years.
Step 1 – get PV of payments
the interest rate per period
rate
0.06
total number of periods in investment
payment made each period
present value
future value
nper
pmt
pv
fv
Step 2 – get PV of the tuition funds
the interest rate per period
total number of periods in investment
payment made each period
future value
present value
rate
nper
pmt
fv
pv
Step 3 – amount she will need to deposit for 15 years
the interest rate per period
rate
total number of periods in investment
nper
future value
fv
present value
pv
payment made each period
pmt
0
do formula here
0.023585
$0.00
use their $277,799 to make step 3
$277,800.00
$0
do formula here
step of the answer – not just type in numbers
ch will be 10 years prior to Lucy’s
%. Sharon estimates the present
8.5-3.0
5.5 divided by 1.03 = 5.3398%
10
($59,999.99)
$0.00
do formula here
$455,753.00
($455,751.96)
do formula here
do formula here
college at a private university.
er year until Allison
($285,362.65)
do formula here
8.5-6.0
277,799 to make step 3 come out right)
do formula here
2.358490566
Case
3
SHARON LAYNEE CASE
ANALYSIS
EXECUTIVE SUMMARY
THE FAMILY
Sharon Laynee (age 50) is a part owner (30%) of Petro King, a C-corporation and recently divorced from Dick (age
50) who is unemployed and entitled to collect $8,000 per month in alimony from Sharon for the next 15 years
(until age 65). Sharon’s mother, Lucy (age 75), has Alzheimer’s and is in a custodial care facility. Lucy’s 20 year life
expectancy is projected to cause her to outlive her financial resources. Sharon intends to support Lucy from the
time when Lucy runs out of money until her death. Sharon’s daughter, Amy, and Amy’s husband, John, and their
daughter, Allison, all live with Sharon. Sharon wants to provide a college fund for Allison in addition to allowing
Amy, John and Allison to continue living with her while John works part-time and finishes his college degree.
Sharon’s salary last year was $350,000. She expects a 7% increase in her income this year. Her net worth is $1.955
million, of which $1,000,000 is the value of her interest in Petro King. Sharon has a mortgage and car loan as well
as the alimony obligation for the next 15 years. If you consider the alimony she pays to Dick as debt, Sharon’s debt
load is high and could preclude her from qualifying to refinance her existing home.
FINANCIAL GOALS AND CONCERNS
1. Determine Sharon’s tax filing status. Whatever her filing status, Sharon has informed you that she will
spend any refund she gets.
2. Determine how to increase Sharon’s monthly cash flow and/or reduce her monthly expenses.
3. Sharon plans to retire at age 65 with annual income of $200,000 in today’s dollars including Social Security estimated to be $25,000 per year at full retirement age (67) (in today’s dollars).
4. Sharon wants to provide for Lucy, her mother, who has a life expectancy of approximately 20 years
although she has no memory (Alzheimer’s).
5. Sharon wants to provide a quality college education for Allison, her granddaughter.
6. Sharon wants to review and update her risk management plan and investment portfolio.
7. Sharon wants to create an estate plan.
EXECUTIVE SUMMARY 177
1.
2.
3.
4.
5.
6.
STRENGTHS
Good earning capacity.
Petro King is appraised annually. Sharon has a put
option to sell Petro King on/before age 65.
The possibility to earn consulting fees for two
years after selling company.
A time horizon of 15 years to build a retirement
portfolio.
She is willing to consider selling existing home or
refinancing it to reduce living expenses.
She has a required rate of return of 8.5% or better,
which is reasonable and should be achievable.
WEAKNESSES
1. She has deficit spending of $29,888 expected in
the current year.
2. Her emergency fund was reduced by the cost of
divorce and deficit spending.
3. Her retirement assets were transferred subsequent
to divorce.
4. There is confusion as to filing status for federal
income tax.
5. The family history of Alzheimer’s but no longterm care insurance coverage.
6. No life insurance coverage.
7. No personal liability umbrella policy.
8. A homeowner’s policy without endorsements.
9. An adult child and family (Amy, John and Allison)
living with Sharon who are not paying rent.
10. An outdated estate plan and other legal documents.
INITIAL OBSERVATIONS AND RECOMMENDATIONS
Insurance – Cover the Risks
• Sharon should purchase the $1,000,000 of 20 year term life insurance for $2,032. While Sharon is single
and will leave an estate once she gets her spending under control, life insurance will provide liquidity for
her estate as well as a lump sum sufficient to fund Lucy’s remaining care, Allison’s education and Sharon’s
last expenses should Sharon die before these goals have been met.
• Sharon should purchase long-term care insurance for a premium of $1,000 per year.
• Sharon should purchase a Personal Liability Umbrella Policy (PLUP) of $1 million for a premium of $250
per year.
• Sharon should endorse personal property in the homeowner’s policy to all risk. Add replacement value to
personal property and a rider for collectibles (to cover the antique clock collection). Increase deductibles
to reduce cost of policy. Savings projected between $2,000 (if Sharon refinances the existing home) to
$4,000 (net savings of $3,750) if Sharon downsizes to a new home and purchases the PLUP.
Debt Management
• Sharon has no credit card debt on her Statement of Financial Position but $4,000 in credit card expense on
her Statement of Income and Expenses. She has a large mortgage in addition to an alimony obligation for
the next 15 years. The home in which she lives has decreased in value, though it is not yet underwater.
• If Sharon sells the existing home for $800,000, the value on her Statement of Financial Position, and
applies the net equity (after 7% cost to sell) of $144,000 toward a down-payment on a new, lower priced
home of $450,000, she can qualify for a new 30-year mortgage of $306,000 at 4% or 15 year at 3.75%.
178 SHARON LAYNEE CASE ANALYSIS
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•
Sharon’s emergency fund needs to be increased to at least 6 months of cash to cover non-discretionary
expenses. She can do this by saving a part of any discretionary cash flow or federal income tax refund she
might receive after implementation of income and expense changes.
• She qualifies for a 2016 federal income tax refund and has stated she will spend any refund she gets. She
can use the 2016 federal income tax refund to pay closing costs on the new home.
See Schedules: Schedules; Cash Flow Refinance; Cash Flow New Home; Income Statement 2017; Ratios Pre
Recommendations; Ratios Post Recommendations, and Tax Analysis.
Ratios
• Sharon’s Emergency Fund ratio is 2.57 (poor) prior to implementation of recommendations. After implementation, this ratio improves to 5.25 (good) but is still less than the goal of 6 months. She can build this
fund over time as her cash flow improves and/or use part of her federal income tax refund for the prior year
to improve the ratio. Six months of non-discretionary cash flow is the target as that is the elimination
period on the long-term disability policy provided by her employer. One of the implementation recommendations is to purchase a long-term care policy. A 6 month emergency fund will complement the purchase of a long-term care policy with up to a 180 day elimination period.
• Sharon’s debt ratio is very strong but it does not include the total of her alimony payment obligation to
Dick. The debt ratio will improve if Sharon downsizes to a new home with a lower mortgage.
• The savings rate will change dramatically (from Weak to Very Strong) as Sharon implements the savings
recommended to meet her financial goals to provide for Lucy and Allison. The additional savings will not
be applied to Sharon’s retirement savings goal, so the retirement savings ratio will not improve.
• Sharon’s Investment Assets to Gross Pay ratio will change and improve over the next year as her salary
increases, Amy and John pay rent, and Sharon reduces her expenses. The increased income and reduced
expenses will create discretionary cash flow, allowing Sharon to save additional resources to meet her financial goals.
Performance ratios will be Poor to Very Poor until Sharon sells her existing home which has been decreasing in
value, recovers from the transfer of her entire 401(k) plan account balance post divorce, and reallocates her
underperforming investment portfolio.
EXECUTIVE SUMMARY 179
Investment Portfolio
• Create an Investment Policy Statement for Sharon’s investment and retirement savings accounts according
to a long-term time horizon of 15 years and in accordance with her PASS score of 24.
• In the short-term, Sharon needs to sell her house and file a tax return to claim the refund she is due for last
year. Selling the house will decrease Sharon’s expenses and will allow her to begin saving for Lucy’s needs
and Allison’s college.
• Sharon will need to apply her tax refund for the prior year to offset the closing costs on the new home. We
recommend that she direct some of her discretionary cash flow to cash and cash equivalents to build a 6
month emergency fund. Any remaining discretionary cash flow can/should be directed to increase savings
for Sharon’s retirement goal.
Retirement Savings
• Sharon should continue contributing $24,000 per year to her 401(k) plan, and continue receiving $10,500
in employer matching funds for a total of $34,500 per year dedicated toward meeting her retirement
income goal. Sharon’s Savings for Retirement rate is Weak and will not provide sufficient retirement funds
to meet Sharon’s retirement income goal without additional savings.
• The value of Sharon’s ownership interest (30%) in Petro King is projected to increase at 3% per year. Petro
King’s value accounts for a large portion of Sharon’s Net Worth, and will upon sale, provide a large portion
of the funds needed to meet Sharon’s retirement income goal. On the balance sheet, we revalued Petro
King from $1,000,000 to its present value, increasing it at 3% and discounting it at the 8.5% portfolio
expected return.
• Sharon has a put option to sell her interest in Petro King prior to or at age 65. We do not know whether
this put option is part of an entity buy-sell agreement or a “trusteed” cross purchase agreement. We also do
not know if the existing agreement has been funded, i.e. the entity or trustee has purchased life and/or disability insurance on all owners.
• Sharon should approach her co-owners to ensure the company or trustee has funded their put options so
that purchasing their ownership interests can be accomplished due to death or disability.
• Improving the growth rate and value of Petro King will benefit Sharon and her partners. The projected
retirement age of the other owners, and whether they also have put options to sell their business interests
any time prior to age 65 or at age 65, is unknown. It is in their collective best interests to increase the value
of the company but the value will be impacted by whether they sell their interest to each other, employees,
or an outside party where economies of scale might impact and/or justify a higher valuation.
• Sharon and the other owners should begin the process of finding a buyer for their company so they can
monetize (sell) their ownership interest at the most opportune time for this business.
180 SHARON LAYNEE CASE ANALYSIS
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Tax Analysis
Review Prior Year and Project Current Year Federal Income Tax Liability
• Sharon’s tax filing status for 2016 and 2017 is Head of Household as a result of the granddaughter.
• While Sharon may consider her mother to be a dependent, as long as Lucy’s assets are exclusively being
used to pay for Lucy’s care, Lucy is not and cannot be claimed as a dependent of Sharon’s.
• John had active income last year before he was discharged from the Army. Amy and John will file a tax
return for the prior year, and will file a tax return for the current year to report John’s part-time earnings
and claim any Earned Income Tax Credit and/or Child Credit available to them. Amy and John are not
Sharon’s dependents. The answer to Sharon’s confusion about her filing status revolves around the question
of whether Allison can be considered a dependent of Sharon’s. If Allison can be considered a qualifying
child, then Sharon can use the head of household filing status.
• Sharon’s grandchild, Allison, can serve as a qualifying child allowing Sharon to use the Head of Household
filing status on her federal income tax return even though Allison is not a dependent of Sharon.
Filing Status – Head of Household (background)
Sharon may be able to file as head of household if she meets all the following requirements.
1. She is unmarried or “considered unmarried” on the last day of the year.
2. She paid more than half the cost of keeping up a home for the year.
3. A “qualifying person” lived with her in the home for more than half the year (except for temporary
absences, such as school). However, if the “qualifying person” is a dependent parent, that parent does
not have to live with the taxpayer claiming head of household status.
There are four tests to determine whether a child is a qualified child to claim a dependency exemption for the
child on your tax return. These four tests are also used as the definition of a child for a taxpayer to qualify to use
the Head of Household filing status.
All of the four tests must be met:
Relationship Test
Abode Test
Age Test
Support Test
Amy and Allison meet this test
Amy and Allison meet this test
Allison meets this test
Allison meets this test
Amy and Allison pass the relationship test and abode test. Amy failed the age test because she is 28. Allison
passes this test because she is less than 19. Amy failed the support test because she is married to John who had
income and provided more than half of her support. Allison meets the support test because she lives in Sharon’s
home. Sharon cannot take a dependency exemption for Allison who will be claimed as a dependent on her
parent’s tax return, but her presence in Sharon’s home allows Sharon to claim the head of household filing status.
A child of the taxpayer who does not meet the qualifying child requirements (Amy) may still meet the
requirement to be a qualifying relative of the taxpayer who wants to use the head of household filing status.
There are four tests for a qualifying relative to qualify as a dependent of a taxpayer:
EXECUTIVE SUMMARY 181
Relationship Test
Gross Income Test
Support Test
Not a Qualifying Child Test
Amy, John and Allison meet this test
Amy and John fail this test; Allison meets this test
Amy and John fail this test; Allison meets this test
Amy and John meet this test; Allison fails this test
Sharon must maintain (pay more than half the cost of) a household as her home which is also the principal
place of residence for more than half the year for:
•
a qualifying child who is claimed as a dependent,
• an unmarried qualifying child who lives with the taxpayer but is not a dependent of the taxpayer (for
example, Allison lives in Sharon’s home but is claimed as the dependent of John and Amy),
• a qualifying relative who is claimed as a dependent of the taxpayer, and is actually related to the taxpayer.
If a married child of the taxpayer (Amy) lives with the taxpayer but cannot be claimed as a dependent of the
taxpayer either because the child files a joint return (Amy and John file married filing jointly tax returns), or fails
to meet a citizenship or residency test, the taxpayer is not allowed to use the head of household filing status.
However, Sharon meets the requirement to claim head of household filing status because of Allison. Allison is an
unmarried qualifying child who lives with Sharon but is not a dependent of Sharon’s.
•
Head of household filing status (bracket) is beneficial to Sharon and means an additional reduction in her
estimated tax liability for the current year. See Schedule: Tax Analysis.
• Sharon should review her personal expenses to determine if she qualifies for a home office deduction.
• Even without home office deductions, a tax projection for the prior year reflects Sharon should file for a
refund due to the alimony she paid to Dick and other itemized deductions. See Schedule: Tax Analysis
2016.
Sharon should file a new W-4 which reflects the estimated reduced withholding for federal income tax due to filing
head of household. The reduction in her 2017 withholding will increase her take home pay in the current and
future tax years. Sharon has indicated she will begin contributions to funds for Lucy’s needs and Allison’s education
from the savings she realizes due to downsizing to a new, lower priced home. However, she has told you that she
will spend any tax savings until she must modify her spending.
Estate Planning
Review and Update Will and Other Documents
• Execute a new will.
• Coordinate beneficiary designations with the new will.
• Create a Revocable Living Trust and transfer Sharon’s assets and business interest to the trust so it can provide asset management in case of disability or incapacity.
• Name the Revocable Living Trust the beneficiary of the new 20-year term life insurance policy on Sharon’s
life.
182 SHARON LAYNEE CASE ANALYSIS
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DISCUSSION TOPICS
1. Treatment of alimony in ratios. Alimony is a required payment that may extend for a number of years.
When calculating ratios for Sharon should her income be reduced by the annual amount she is required to
pay her ex-husband, or should the annual alimony amount be treated as debt? How will the treatment
impact Sharon’s housing ratios? Other ratios?
2. Extended family and your finances. Sharon’s daughter and her family are living with her and their presence may have contributed to her deficit spending. It is understandable to want to help family but at what
cost? Should Sharon request or require her daughter to pay rent to live with her? If Sharon does charge her
family rent, how should she treat it on her federal income tax return? Can Sharon deduct payments made
on behalf of her family on her federal income tax return?
3. Incapacitated parent and dependency status. Sharon’s mother, Lucy, lives in a special facility for Alzheimer’s patients and pays for the facility with her own resources. Sharon considers her mother dependent but
Lucy does not meet the tax definition of a dependent. Discuss incapacity and how to handle it from a legal,
financial and decision making perspective versus the tax definition of dependent.
4. Decision making for a ‘Single’ friend or loved one. Sharon is single and has a parent with Alzheimer’s.
Single adults need to prepare for the possibility that they become disabled or incapacitated. Adult children
are the most likely to be named in documents, but may not be the best person for the job. Discuss the skills
needed and documents required for a friend or loved one to help a single adult who becomes aged, disabled
or incapacitated.
5. Sale of a home post-divorce. Sharon was awarded the family home as part of the divorce settlement. Alimony payments and other issues impacted Sharon’s financial condition making it difficult for her to keep
the house. If Sharon sells the home, will the sale of the home post-divorce be treated differently than a typical home sale? Yes, no gain or loss on transfer between spouses. Basis and holding period carry over to
spouse who receives property. Exclusion of gain on the sale would be limited to $250,000 because Sharon
is Single, but Sharon will not have a gain on the sale anyway.
6. Traumatic events and lifestyle changes. Death of a loved one, divorce, and disability are traumatic events
that profoundly impact people in different ways. Sharon seems to be a take charge lady able to make decisions on her own. However, Sharon’s decision making process might have included her ex-husband. If it
did, should there be a ‘no decision’ time period during which Sharon should be counseled to hold the status quo or not make any significant changes? Should she put off most financial decisions or only the ones
that will impact her long-term?
7. Small business as a source of income. Discuss Petro King’s use of the stock holding requirement to keep
Sharon and her co-owners involved in the business. Sharon has a put option that she can exercise at any
time up to age 65. Should she consider exercising her put option now or before age 65 to solve her financial problems?
8. Small business as an investment. Discuss how to determine an appropriate growth rate Petro King especially since the sale of Sharon’s interest in the business is expected to fund her retirement. Should the
growth rate required for Petro King be the same or greater than Sharon’s required rate of return for her
investment portfolio?
DISCUSSION TOPICS 183
9. Small business and divorce. Sharon owned her part of Petro King before she married Dick and was not
required to share her ownership interest in the business with him. Discuss various ways for a small business
owner to protect themselves and their ownership interest from a forced sale due to divorce. Discuss Pre and
Post Nuptial Agreements, business partnership agreements, shareholder agreements, confidentiality agreements, structured settlements.
10. Expensive cars, collectibles and lifestyle. Sharon purchased an expensive car (Mercedes) post divorce and
owns an antique clock collection. She is having financial trouble that may force her to sell her family home.
Some have suggested Sharon sell the car, the collection or both, but Sharon resists. Discuss pros and cons
of selling the car, the collection, and/or the home.
ACCOMPLISHING GOALS
KEY ISSUES
The key issues include:
1. an alimony obligation that extends for years which has contributed to Sharon’s deficit spending,
2. the change in Sharon’s federal income tax filing status,
3. the impact of the divorce property settlement on Sharon’s retirement account,
4. the addition of a new financial goal to provide a private college education for Sharon’s granddaughter, and
5. the wish to support Sharon’s mother, Lucy, if she runs out of money.
NARRATIVE
Sharon wants to help her family and has several family members depending on her, but she does not have life
insurance. She needs to address risk management issues as well as her deficit spending. Sharon also needs to
determine her filing status for federal income tax purposes immediately because the answer (Head of Household)
will allow her to file her tax return to collect a sizable federal income tax refund. The refund will help Sharon
handle her deficit spending and provide the funds needed to pay for the sale of her existing home and the purchase
of a new, less expensive home. While it may be painful to sell her home, selling it will allow Sharon to reduce her
living expenses and increase her discretionary cash flow which can be used to address Sharon’s other financial goals
which include rebuilding her retirement portfolio, making contributions to a college fund for Allison and setting
aside funds to pay for Lucy’s care, if necessary.
GOAL: SALE OF SHARON’S BUSINESS INTEREST AT AGE 65.
The value of Petro King, a C-Corporation, is based on an appraisal and the fact that Sharon has a put option to sell
(based on the appraisal price) anytime she wants up to age 65, when she is required to sell. The business is valued
annually and there is no minority or liquidity discount considered. The growth rate for the company is 3% per
year.
Sharon plans to continue working for 15 years, until age 65, and use the put option to sell her interest in Petro
King. The assumption was made that Sharon could be offered an opportunity to continue working for Petro King
for two years following the sale of her interest. Sharon has indicated she wants to sell her interest and retire. In 15
years, at a 3% growth rate, Sharon’s $1,000,000 interest in Petro King is projected to be worth $1,557,967. The
present value of receiving this amount in 15 years is $458,260 using an 8.5% discount rate. FV = $1,557,967, N =
15, i = 8.5%, PMT = 0, PV = $458,260. We put Petro King on our Balance Sheet following recommendations at
the present value of $458,260 so that is could appreciate at her portfolio earnings rate.
184 SHARON LAYNEE CASE ANALYSIS
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The value of Sharon’s interest in Petro King when sold at age 65 and contributed to her retirement fund in the year
she retires will help to make Sharon’s retirement goal obtainable. See Schedule: Business.
GOAL: SHARON’S RETIREMENT (See software calculation – Long-Term Goals 2 PV All Goals)
Sharon cannot retire at age 65 with $200,000 per year, meet all three of her goals of Allison’s education and Lucy’s
potential needs. However, she could:
• Retire at age 65 with $160,000 and meet her other two goals at the current savings rate.
• Plan to retire at age 67 with $200,000 and meet her other two goals at the current savings rate.
• Wait and see because Lucy may or may not need her support and it may be less than she is currently expecting.
Plus, Dick could die anytime and her alimony would stop upon his death.
GOAL: LUCY’S CARE
Sharon estimates that Lucy’s funds will be depleted in 10 years (as of 2027), which will be 10 years prior to Lucy’s
life expectancy. Lucy’s care is $60,000 per year in today’s dollars, increasing at 3%. Sharon estimates the present
value of the fund needed to care for Lucy is $285,362. She will deposit $43,491 for 10 years to create the needed
funds.
Using the Account Balance Method
Step 1
Step 2
Step 3
PV
= $60,000
PMTAD =
$80,635
FV
=
$645,200
i
N
PMT
FV
= 3%
i
N
FV
PV
5.3398% (inflation-adjusted rate)
10
0
$645,200
i
N
PV
PMT
=
8.5%
10
0
$43,491
= 10
0
= $80,635
=
=
=
=
=
=
=
Using the Traditional Method
Step 1
PMT
i
N
FV
PV
= $60,000
= 5.3398 (inflation-adjusted rate)
= 10
0
= $455,753
Step 2
FV
i
N
PMT
PV
=
=
=
=
=
$455,753
5.3398
9
0
$285,362
Step 3
PV
i
N
FV
PMT
=
=
=
=
=
$285,362
8.5%
10
0
$43,491
See Schedule: Lucy’s needs
GOAL: ALLISON’S EDUCATION FUND
Sharon wants to create an education fund for Allison so she can 4 years of college at a private university. Tuition is
$30,000 per year in today’s dollars and is expected to increase at 6% per year until Allison begins her studies in 15
years.
ACCOMPLISHING GOALS 185
Using the Account Balance Method
Step 1
Step 2
Step 3
PV
= $30,000
PMTAD =
$71,897
FV
=
$277,800
i
N
PMT
FV
= 6%
i
N
FV
PV
2.3585(inflation-adjusted rate)
4
0
$277,799
i
N
PV
PMT
=
8.5%
15
0
$9839.77
= 15
0
$71,897
=
=
=
=
=
=
=
=
(rounded to $9,840)
Using the Traditional Method
Step 1
PMT
i
N
FV
PV
= $30,000
= 2.3585 (inflation-adjusted rate)
= 4
0
$113,245
=
Step 2
FV
i
N
PMT
PV
=
=
=
=
=
$113,245
2.3585
14
0
$81,712
Step 3
PV
i
N
FV
PMT
=
=
=
=
=
$81,712
8.5%
15
0
$9,839.76
(rounded to $9,840)
See Schedule: Education
OTHER CONSIDERATIONS
•
•
Sharon can begin claiming Social Security benefits after she retires. If she claims at age 65 she will receive a
reduced benefit of $21,667 or $25,000 at age 67.
Review and reallocate Sharon’s investment portfolio based on her PASS score of 24.
186 SHARON LAYNEE CASE ANALYSIS
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KEY SCHEDULES
PASS SCORE AND ASSET ALLOCATION RECOMMENDATIONS
Global Portfolio Allocation Scoring System (PASS) for Individual Investors
Questions
Strongly Agree
Agree
Neutral
Disagree
Strongly
Disagree
Sharon
5
4
3
2
1
4
5
4
3
2
1
5
5
4
3
2
1
5
5
4
3
2
1
3
5
4
3
2
1
4
5
4
3
2
1
3
1. Earning a high long-term total return that will
allow my capital to grow faster than the inflation
rate is one of my most important investment
objectives.
2. I would like an investment that provides me
with an opportunity to defer taxation of capital
gains to future years.
3. I do not require a high level of current income
from my investments.
4. I am willing to tolerate some sharp down
swings in the return on my investments in order to
seek a potentially higher return than would
normally be expected from more stable investments.
5. I am willing to risk a short-term loss in return
for a potentially higher long-run rate of return.
6. I am financially able to accept a low level of
liquidity in my investment portfolio.
24
Global Portfolio Allocation Scoring System (PASS) for Individual Investors – developed by Dr. William Droms
(Georgetown University) and Steven N. Strauss, (DromsStrauss Advisors Inc.) – model used with permission.
Portfolio Analysis (after implementation)
Sharon Laynee
Cash and Money Market Fund
Treasury Bonds/ Bond Funds
Corporate Bonds/ Bond Funds
International Bond Funds
Index Fund
Large Cap Funds/Stocks
Mid/Small Funds/Stocks
International Stock Funds
Real Estate Funds
Current
Porfolio
(Dollars)
$76,532
$0
$0
$0
$400,310
$0
$0
$0
$0
$476,842
Current
Portfolio
Percentage
16.0%
0.0%
0.0%
0.0%
84.0%
0.0%
0.0%
0.0%
0.0%
100.0%
PASS RT3 Longterm
Recommended
Portfolio
3%
12%
10%
5%
20%
15%
10%
10%
15%
Difference
13.0%
-12.0%
-10.0%
-5.0%
64.0%
-15.0%
-10.0%
-10.0%
-15.0%
Expected
Rates of
Return
2.5%
4.0%
6.0%
7.0%
9.0%
10.0%
12.0%
13.0%
8.0%
Expected Return
Current
Expected
Return
$1,913
$0
$0
$0
$36,028
$0
$0
$0
$0
$37,941
7.96%
PASS
Expected
Return
$358
$2,289
$2,861
$1,669
$8,583
$7,153
$5,722
$6,199
$5,722
$40,555
8.51%
KEY SCHEDULES 187
188 SHARON LAYNEE CASE ANALYSIS
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