VIEWS: 39 PAGES: 9 POSTED ON: 6/28/2011
MINI-CASES – QUESTIONS- IN FINANCE RISK MANAGEMENT CLASS -FALL 2002 1. HOME EQUITY LOAN 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 idea? 2. EARLY RETIREMENT 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? 3. MORTGAGE 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? 4. MORTGAGES 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? 1 5. AVOIDING TAXES 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? 7. MUTUAL FUND EXPENSES 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? 9. REFINANCE 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 2 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? 11. POWER OF ATTORNEY 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? 12. FINANCIAL PLANNERS 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? 13. TECHNOLOGY STOCKS 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? 3 14. REFINANCING 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 paid? 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? 16. UNEMPLOYED 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? 17. WTC ATTACKS 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? 18. INFLATION 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? 4 19. INFLATION-2 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? 20. HEALTH CARE COSTS 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? 21. LIFE INSURANCE 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? 22. MUTUAL FUNDS 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. 5 23. DOWNPAYMENT FOR A HOUSE 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? 24. INTEREST COMPOUNDING BENEFITS 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? 25. MORTGAGE RATES 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. 26. FUTURE INVESTMENT 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. 27. SOCIAL SECURITY 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? 6 28. INVESTING MONEY 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. 29. MUTUAL FUNDS 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? 30. PENSION 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? 31. CHANGING MUTUAL FUNDS 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? 7 32. EARLY RETIREMENT 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 account. 34. INHERITANCE 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? 35. RETIREMENT 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? 36. CAPITAL GAINS 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. 8 37. STOCKS FOR GRANDCHILDREN 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. 38. CREDIT CARD DEBT 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? 39. LOW INCOME EARNER 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? 40. COLLEGE STUDENT 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. 41. BEAR MARKET Q. How are corporations and individual wealth doing in the current "bear market"? 9
"MINI-CASES – QUESTIONS- IN FINANCE"