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					                 MINI-CASES – QUESTIONS- IN FINANCE
                              RISK MANAGEMENT CLASS -FALL 2002


Q. This is my current situation. I’m single, 61, and earn $10 an hour working as a checker in a grocery
store. I have a car loan of about $11,000 with $116 payments taken out of my check twice monthly. I also
put $120 into a 401k plan each pay period and another $60 into savings to cover the cost of my insurance
Due to the terrorist attacks of last September, I’ve lost some money in the 401k plan and I’m wondering if
I’m putting in too much money? After everything is taken out of my check I bring home about $450
every two weeks. With the pad rent for my mobile home at $336 a month, $55 for electric power, $40 for
gas, $24 for phone, $22 for life insurance, and $9.75 for garbage there is barely enough for me to exist.
My mobile home is paid for.

I’ve considered getting a home equity loan to do some improvements and to pay off the car. Is this a good


         Q. In order to retire sooner, my plan is to take the equity in my home and invest it in a duplex. The
payment will be the same as I currently pay so in case of a vacancy I can still easily make the payment.
Otherwise, the rent from the other side will cover the monthly payment. This will save me my
$1000/month house payment, which I will invest. The downside, of course, is that I’m exchanging one
mortgage where I’m paying mostly principal for a new mortgage where I’m paying mostly interest. In 6
years I’ll own my home, but I won’t have that much equity in the duplex after 6 years. Balancing that will
be all those months of no house payments.

       What should I do?


Q. My question is the following: should I completely pay off my $400,000 mortgage at 7.75 percent,
taken out in 1994, or should I continue to use it for interest deductions and reinvest my money? If so,
what are my realistic expectations for annual returns and any recommendations? I would still have
$50,000 in the bank, excluding 401(k)’s, for immediate cash needs.

               What should I do?


 Q. This is my problem. On a 30-year mortgage at 5.75 percent interest, how many years can I cut off the
note if we pay an extra payment or two or three a year? My husband is 50 and I am 52. We sure don't
need to be paying on this any longer than we absolutely have to. We are buying a new home for
$220,000.00 at 5.75 percent. We are putting $80,000.00 down and therefore financing $140,000.00. So,
do you have any other ideas that we could do to pay it off sooner?

What should I do?


Q. This is my situation. I am 51 years old with $275,000 in a money market fund. I own my own car and
have a mortgage of $900 a month. I make $125,000 a year and put the maximum percentage into my
401k. It has a balance of about $50,000.

What is the best investment for the $275,000 that I have no need to spend? Taxes are eating me alive.
Should I go into a high- yield tax-exempt fund or a tax managed fund?

What should I do?

6. Index or Managed Fund
  Q. I am 58 and am looking at retiring at 62, if possible. I still plan to work after 62, but not at the same
pace. I have about $600,000 in my company 403(b) plan, all invested in Fidelity Magellan. We have
recently switched to the Vanguard family and have several choices there. One of the choices is the
Vanguard 500 Index Fund. Would it be advantageous to switch from Magellan to the index? I know that
the index fund has management fees that are much lower and that tax treatment is better. Otherwise, I
have $150,000 in various individual stocks, own my own home, and have no debt. Would you advise a
change or just ride it out with Magellan?


Q. My question is this: The Castro fund has the lowest expense ratio at 0.30 percent but the year-to-date
yield is 6.0 percent. The PIMCO Real Return A fund has expenses of 0.90 percent with a yield of 11.17
and PIMCO Real Return D has expenses of 0.75 percent and a yield of 9.65. Now I’m confused! How
much of an impact does the expense ratio make--- would it wipe out the difference between funds?
Should I put some of the money in an S&P Index Fund?

What should I do?

8. Passive Investing in Retirement
Q. These are my questions: how much money is needed for retirement. How do you withdraw them? Oh,
I know the IRS has a minimum withdrawal schedule for IRAs and such, but should you keep the money
in the index funds as is, or do you need to make some changes? For instance, should you put everything in
bonds just before retiring? Is there a difference in strategies needed if they’ve grown tax-deferred? How
best to protect the portfolio from market risk while minimizing income tax and still maximizing earnings?


Q. This is my personal situation. I’m a single mom, professionally employed, and own a small home
(valued at $175,000 with a $112,000 mortgage balance) and a large townhouse on Longview. A large
chunk of my retirement money is sitting in the equity of the rental townhouse that is valued at $329,000
with a $155,000 mortgage.

        I pay about $25,000 a year in expenses for the Longview house and collect about $10,000 a year in
short term rental income. The problem is that 70 percent of my net income is going to support the two

houses and my daughter will be starting college soon. (My net monthly income is $4,500 a month.). I’m
also going to be 55 soon.

What should I do? Refinance? Sell? What?

10. Teachers’ Income
Q. My wife and I are teachers, earning together $68,040 annually. We work in a local district. I am
retired U.S. Air Force ($14,000 pension). We have a house, mortgaged for $113,000 at 6.58 percent. And
we are in debt, with payments of $1,900 a month. We’re paying off the credit cards and forcing ourselves
to invest $100 a month between us. Is it better to use the entire $100 in one plan or split it? What is the
safest way to invest with the greatest return?

What should we do?


Q. I am “POA” (Power of Attorney) for my 90-year old father. A year ago, it was decided, with other
family members, that we should invest one-third of his $390,000 estate in mutual funds that were
supposed to be the lowest risk of all, according to Morningstar. Before then, all his money had been
invested in CDs. We also put $30,000 of that $130,000 investment in individual stocks. Today that
$130,000 is worth only $100,000 and the mutual fund ratings are dropping.

What should we do?


Q. This is my problem: I will be 63 soon. I am very healthy. Not employed. I have $420,000 in 3 separate
IRA accounts, down from $800,000 in January of 2000. I am currently with a full financial planner. A
money manager handles each IRA and I am paying 2 percent for the service. I have learned that the
stockbrokers, while nice, are really not into keeping up with and dealing with what is really going on in
the stock market. They are sales people. I went the financial planner because I am not qualified to make
investment decisions on this level. I calculate that if things do not change, I will go broke in 9 years. So I
am very open to your input.

What should I do?


Q. My wife and I have invested heavily in tech stocks. We have around $110,000 in technology mutual
funds. We had about $200,000 before the crash. This represents about 1/3 of our total portfolio. I was
wondering if you thought we should reinvest this amount in index funds now or would it probably be
better to keep them where they are?

What should we do?


Q. We want to get a home equity loan. We currently have 6 years to pay on a 15-year mortgage. Our
home is valued at $180,000. The mortgage has a $65,000 principal balance. We have decided to remain in
this home for several years but we need to make some improvements. The cost of the improvements will
total about $50,000. My husband has stock options he could sell in February 2002. They would net us the
$50,000 needed for the improvements. Would we be better off paying for the improvements out of the
stock sale or refinancing the house for another 15 years to take advantage of the tax benefit of the interest

What should we do?

15. SOCIAL SECURITY – Pay as you go or privatization?

Q. Would you please explain to me why privatizing Social Security with all its uncertainties (when
withdrawal time comes) is better than the government investing the funds in a broad index fund--- such as
the Wilshire 5000?


  Q. This is my current situation. I just became unemployed from the downsizing of the telecom industry.
I want to know how to manage my resources wisely. I have about $150,000 in 401(k) a ssets, all in growth
funds. I also have $10,000 in cash and $10,000 in a CD, earning 5 percent. I also have $1,200 a month in
unemployment insurance. I owe $75,000 on a 6.375 percent mortgage with a $1,000 payment, a $5,000
car loan at 5 percent with a $400 payment, and no credit card balance.

The strategy I have in mind is the following:
For the next 3 to 9 month job search should I borrow from my 401k, get a home equity loan, sell the
house and move into a two bedroom apartment, cash in the CD, use the credit cards until they max out,
then use the cash on hand?

What should I do?


Q. This is my current condition. I have some 401(k) money with Alger Growth Retirement Fund, which
has a good 5- year average return and good category ranking according to Morningstar. In light of the
WTC attack where this fund lost both its managers, do you think it would be wise to transfer this
investment? If so, should it be done now or when the market le vels out?

What should I do?


  Q. I have been searching about Treasury Inflation Protected Securities (TIPS). In light of the Fed
increasing the money supply into the economy and the eventual return of inflation, would this time period
be a good time to buy TIPS? What are the possibilities of returns on TIPS?

What should I do?


Q. I’m trying to figure out the best time to buy Treasury inflation indexed securities (TIIS) and stock
market linked CDs. Historically, have times during war been inflationary or has inflation hit after the war
was over? Could you discuss this?


 Q. My husband is 72 and has been retired for 7 years. I intend to retire in 2004 at the age of 62. Our
house is paid for and is worth $200,000. We will be free of consumer debt when I retire except for a home
equity loan of $18,000. Both of us will be receiving annuity pensions and Social Security. We presently
have $375,000 in IRA and 403b funds.

I am interested in health-care cost protection in the future, yet feel the long term health-care industry is in
turmoil. Would it be too risky if I were to open a Wilshire 5000 taxable no- load fund costing about $2,000
to open and invest $100 per month by direct deposit?

What should we do?


  Q. My question concerns whether I should purchase a whole life policy. I am 33 years old with a four-
year old child. My wife is a stay-at-home mother. I make $70,000 a year. The policy calls for a $200,000
minimum death benefit with the premiums paid up at age 65. The Financial Planner is recommending the
policy called financial planning package called LEAP Systems to analyze that I would be better off to
limit the contribution to my 401(k) account to purchase this policy (but still get the employer match.) My
wife and I currently have $60,000 saved in a rollover IRA invested in the Vanguard Total Stock Market
Index. In addition, I contribute 8 percent of my current salary to my 401(k) account (65 percent invested
in Vanguard 500 Index, 25 percent in Vanguard Capital Opportunity Fund, and 10 percent in Putnam
International Growth Fund). My employer matches 6 percent of my contribution and contributes an
additional 5 percent in a money purchase pension plan. In addition, we invest $3,000 each in a Roth IRA.
I currently have $200,000 group life insurance. He also recommended I stop making one extra mortgage
payment each year and apply that amount to the whole life policy. The agent states this policy has never
paid a dividend less than 8 percent. Do you feel this is the best route to go or are we currently on the right
course to retirement?

What should I do?


Q. An independent financial organization is attempting to convince me that mutual fund costs to the
investor are higher than independent investors. They say that costs are significantly higher than the stated
expense ratio. The other costs include things like trading commissions, trading costs, etc. As a buyer of
mutual funds, are some of these costs hidden? Are mutual fund companies like Vanguard not telling
investors all the costs or are the independent companies marketing in a fraudulent manner? They are
claiming their costs will be 1.5 to 1.75 percent versus 3 to 5 percent for a mutual fund.


Q. My wife and I work full time and make $130,000 a year. We have about $40,000 in debt (loans and
credit cards) due to adoption costs over the last four years. We also have about $30,000 to $40,000 in
equity in our house because the value has appreciated. My question is whether it makes sense to buy a
larger, higher priced house with little or nothing down? We would then sell our current house, take the
equity, and pay off our bills. Seems that the higher mortgage payment would be easily made without the
loan and credit card payments and the interest would be tax-deductible. Should I get into more debt?

What do you advice?


Q. I need help to compute the gains/loss of my fixed-income investments.I am trying to calculate this for
myself based on the following assumptions:

      A $50,000 Fixed Income Investment to be allocated toward a five-year Treasury Ladder in a SEP-
       Ira account with Vanguard Brokerage Service account.
      The alternative is the investment with annual expenses of a Vanguard Short (or Intermediate)
       Term Treasury Bond Fund (.27% per year).

   I have 20 years to retirement. How exactly would one quantify the return lost (due to the reduction in
compounding) versus the additional expenses of the bond fund?


        Q. Can you tell me how mortgage rates are figured? In other words, what makes the rate available
what it is? We want to refinance our home but our lender is not very responsive. We want to learn more to
be better educated.


        Q. Can you assist us in this matter? We are looking to calculate how long our money will last if
the investments are making 9% and we are drawing out 11% yearly.


Q. I need your help. I am in a depressed condition. I am 60, divorced, supporting myself and having some
health issues. A shorter workweek might enable me to improve my health. I am allowed to make up to
$940 monthly gross income. (In order to make that amount, I would have to request a reduction in pay at
work).Last week I visited the Social Security office to determine if I could take early retirement as of June
2003. The answer appears to be no. In fact, it looks as if I will never be able to retire. My company,
where I have been employed for 24 years, will allow me to work part-time and keep all my benefits.

        The IRS tells me I would be taxed at 10% for the first $6,000 I earn and $15% for anything over
that. I would be allowed $7700 in deductions for 2002. Social Security will pay $708 a month. What I
need to know is how much net income including the Soc. Sec. would I ha ve to work with?

What should I do?


         Q. We could use some advice investing money. We recently sold a rent property and it netted
$33,000. We also have $10,000 from a flood loan that government provided due to hurricane Allison. We
started repaying it monthly in February at $357 for the next two and a half years. The loan rate is 4
percent. We’ll also have a tax refund of $8,000 this year. Our obligations include our house note, $1,500
a month for mortgage and escrow, two car payments totaling $956 monthly, and $15,000 in credit card
debt. I recently lost my job but my wife makes $55,000 in her teaching job. Between us, we have
$220,000 in 401(k) and 403(b) accounts. We also have $5,000 in savings and $15,000 in mutual funds.
Our oldest child will start college this fall. My wife and I can be very frugal since we both grew up in
impoverished families, but our three kids do not know that lifestyle. Nevertheless, they will need to cope.

Assuming a worst-case scenario--- no job for me for a year--- what should we do immediately and into
what investment vehicles should we put our money from the first paragraph.


Q. Do you consider being 50% invested in Vanguard's S&P 500 Index Fund, and 50% invested in
Vanguard's Total Bond Index Fund (or another bond fund) a fully hedged position? Why or why not? Do
you consider any percentage combination of these funds a fully hedged position? Does the opportunity
exist to be able to achieve a fully hedged position using any combination o f funds within any family of
funds? If so, what funds?


Q. I have three questions. First, why would retirees with pensions they could survive on (especially
pensions with cost of living increases) want any bonds at all? Second, why would anyone in, or
approaching retirement, load up on growth stock paying little or no dividends? Third, since all
distributions from an IRA are subject to the same tax, why would anyone load up an IRA with more than
30 percent “growth” stocks?


        Q. I retired over twelve months ago and moved all of my 401k money to a financial planner to
invest. It amounted to $700,000. I agreed that I could accept moderate risk. By the end of August, the
funds had decreased to around $560,000. On September 10th I told him to move the funds to a money
market account. When the market reopened, the transaction executed. A small amount of money was lost
before the completion of the transaction. I paid him $1,500 to manage the account. As far as I am
concerned, he did nothing for me! A few days later I moved the entire account to TIAA/CREF. (My wife
had an account there, which made it possible for me to open an account.) I am now earning 6.25 percent
on the account.

At this point I would like to invest 50 percent of the $545,000 (I had to draw funds for expenses) in a
stock mutual fund using the following logic to select the funds to invest in: (1) The fund would be 5 to 2
years old. (2) Growth would have averaged over 20 percent annually. (3) Earnings for t he last six months
must have exceeded 10 percent. (4) The fund must have a Morningstar rating of 4 or 5 stars.

What do you think?


Q. My wife and I are in our mid 30’s with one child and ano ther on the way. We’ve been put away in
qualified plans--- about $220,000. Over the past 3 years we’ve been continuing with adding qualified
funds on a consistent basis ($10,000 a year for each of us). We are focusing any additional funds in non-
qualified investments (now about $75,000) to bridge the early retirement gap, college, and weddings.

Our plan is for me to retire at age 50. My question is should we consider reducing or eliminating our
qualified plan contributions for the next three years or so and redirect these funds to a 529 plan or any
other non-qualified fund activity. The plan is to use non-qualified funds to bridge to my 59-½ money.
One of my first concerns is the increased tax liability with this strategy and if I have enough money
already set aside to keep my retirement standard o f living, estimated at $90,000 a year, net. Do you think
this is a sound strategy?

33. 401K AND 403B

Q. Could you please explain me the difference between 401K and 403b. In an effort to diversify my
retirement 401k accounts (in addition to non-retirement accounts), would it be wise to try to make all
bond investments in the retirement 401k accounts and all stock investments in non-retirement accounts? I
think that the redemption of stock gains (hopefully) from a 401k retirement account will be taxed at one’s
tax bracket rate, whereas the same gains will be taxed at potentially a lower capital gains rate in a taxable


        Q. I will soon be receiving about $200,000 as an inheritance from my beloved grandparents. I
want to do the right thing(s) with this money. I am married with two children. My husband and I are in
our early 40’s and our oldest child will be going to college in 6 years, our youngest in 12 years.

        Our total debt, which includes our mortgage, is about $190,000. Our home is valued at $250,000.
If we paid off all debts including our mortgage, we could comfortably invest $1,400 a month, possibly
more. We could also invest the entire inheritance and keep paying on this mortgage or refinance to a 15-
year. There are so many options my head is swimming! Which course of action should we choose?


Q. My husband and I are retired and aged 75 and 69. We have a good chunk of change that has been
invested in three- month Treasury bills for a couple of years. As you know, the interest is nearly non-
existent at this time. Do you have any suggestions for alternatives?


Q. I was wondering how one can re-balance one’s portfolio now or in the future (after retirement)
without getting slammed for good old capital gains.


        Q. We have two precious grandchildren, one is 11 and the second 12 year old. We would like to
invest stocks they would enjoy following. Do you have any suggestions? We’d like stocks with a good
possibility to go up, or at least not crash and with products they may be familiar with.


        Q. We are ourselves in some financial crises. We have got into debt a lot. We have over $20,000
in credit card debt and can barely pay the minimum amount due. We have gotten an offer by mail for a
“Disappearing Debt” loan from MBNA. Supposedly, we are pre-approved for up to $15,000 and can
apply for a higher amount. The payment would be about $400 a month, as opposed to what our current
minimum payments of about $600. Is it a bad idea to go with this type of loan? We don’t have enough
equity in our house to borrow against it and we do not have any savings set aside.

We should we do?


 Q. I work in non-profit organization as a social worker, so my salary is not very attractive. I am 38 year
old. My salary has never exceeded $28,000. I understand I must save 15 percent of my income for
retirement. My question is this: When people talk about 15 percent I always imagine them thinking of
someone with a larger salary than mine. Often articles use figures of $50,000 or more and I feel left out.
What can a low- income earner do about her retirement? Chances are, while I may eventually earn $40,000
a year, I will never make a large income.

What should I do?


        Q. I’m 20 years old and am about to start my 401(k) but I don’t have much knowledge in the area.
I am a part-time college student. Fortunately, I make decent money for my age, and I want to start putting
away for retirement. At the same time, I’m an avid traveler when I’m not in California, so I don’t want to
take too much away from my paycheck so I can travel as well. (Next stop is Spain and perhaps Paris.)

        Do you have any suggestions that might help me get started in the right direction? I don’t mind
taking a bit of a risk, but the way things are going I’m a bit confused on where I should start.


 Q. How are corporations and individual wealth doing in the current "bear market"?


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