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Frank and Madelyn Stuart
Frank and Madelyn Stuart believe they have a solid financial future; however, they are concerned about
the actions they need to take to ensure college educations for their two children. They would also like to
have the funds for the medical expenses that will be incurred for one child to correct a congenital issue.
Retirement funding and estate planning are also issues they wish to address. They came to you for
assistance in determining how they can achieve these goals. You have requested and received
documentation to analyze and review, and you have had conversations with the Stuarts about their
concerns in multiple planning areas. Today is January 1, 2014.
Personal Background and Information
Frank Stuart (Age 35)
Frank is a doctor, specializing in internal medicine, and is an employee of Lakeside Hospital. Frank’s
salary compensates him for patients seen at both the hospital and the Lakeside-owned clinic. He is
starting his sixth year of practice. He has been discouraged lately with the medical economic
environment. Given the proliferation of managed care and reduced Medicare/Medicaid fee
reimbursements, he sees only a limited ability to increase his salary and is resigned to stay as an employee
of the hospital instead of venturing into private practice.
Madelyn Stuart (Age 35)
Madelyn is a nurse practitioner but has not worked in her profession since the children were born.
Madelyn has an uncanny sense for shopping for unique items that she buys, adds a markup, and resells on
online auction sites. She marks up an item 100%, does not sell the item for less than its marked-up price,
and charges the online buyer for all related shipping costs. For 2014, she has significantly changed the
dynamic of her business and expects to generate up to $90,000 of net income after expenses from the
business this year.
Children
Blake, age 7, is a student at Neighborhood Elementary School. He plays youth football in the fall and
Little League baseball in the spring. He is an active and healthy child.
Lisa, age 5, also attends Neighborhood Elementary School. She was born with some physical disabilities.
The Stuarts have been told the issues may be partially or completely corrected by surgeries and physical
therapy by the time she is in high school. It will be a time-consuming process requiring multiple
hospitalizations, but the couple is hopeful for success. Doctors have told the Stuarts that Lisa is expected
to have only minor limitations after her childhood surgeries. Because Frank is a physician, the Stuarts’
understanding of the diagnosis and the remedies is better than for most parents.
Frank’s Family
Frank is an only child and has been his parents’ pride and joy. Frank’s parents, Arthur and Judy, are first-
generation immigrants from England. They immigrated before Frank was born and operate a small garage
specializing in foreign car repairs and restorations. Frank and Madelyn met at the garage when Madelyn

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brought her car there while in college. They often visit Frank’s parents at the garage because Frank
enjoys working with his dad on some of the projects, especially the restorations. The elder Stuarts own
the building that houses the garage. The fair market value of the building is $150,000. The neighborhood
has seen renovations in recent years, and the outlook for continued renewal is good. The garage enjoys a
steady stream of loyal customers and has generated moderate wealth for Frank’s parents, which they have
invested prudently in both retirement accounts and mutual funds. They are both 60 years old and are in
fair health.
Arthur and Judy have no family in the United States except for Frank. Arthur and Judy were your clients
in the past, and you still have some of their financial records on file. The Stuarts tell you that as Arthur
and Judy approach retirement, their primary concerns are the high costs of long-term residential and
medical care for the elderly and whether their savings are sufficient for their retirement years. Frank and
Madelyn would like to know what they can do to help Arthur and Judy. They have asked you to share
the elder Stuarts’ financial records so they can determine how to best assist them
Madelyn’s Family
Madelyn’s parents recently died in an auto accident, and their estates are in probate. Frank is the
executor of both estates. When they are settled, Madelyn’s share of both estates could be in excess of
$500,000. The couple has not determined precisely what to do with this inheritance and would like you
to calculate what they need to do to reach their stated goals without consideration of these funds. They
would like to hear your ideas for utilizing this money.
Madelyn is close to her only sibling, Joanne (age 40). She and Joanne are the sole beneficiaries of their
parents’ estates. Joanne is unmarried and has no children. Joanne is particularly close to the Stuarts’
children. In the past, Joanne has mentioned to Madelyn that she would consider assisting with the
educational and maintenance needs of Blake and Lisa. She wants to disclaim her share and direct her
portion of the estate to her niece and nephew. Joanne has given up her job as a business education
teacher to be a full-time author of financial self-help books and works out of her home. To date she has
enjoyed tremendous success and has raised her annual income from $70,000 to $200,000.
Personal and Financial Objectives
In order of priority:
1. The Stuarts want to provide each of their children with up to $25,000 (today’s dollars) per year
for four years of college education. The children will have to pay for the costs of any graduate
school. The Stuarts would like to have accumulated the funds by each child’s first year of college.
2. They want to be free of mortgage indebtedness by the time Frank is 55 years old.
3. They plan to retire at the full retirement age (FRA) of 67 and want enough retirement assets to
replace 70% of Frank’s preretirement salary. They want to include Social Security benefits
when planning for their retirement. They want to try to avoid superannuation. They would
like to know whether they are on track to achieve their goal.
4. The Stuarts want to review their insurance coverage and make changes as needed. For purposes
of determining any additional life insurance needed on Frank’s life, the Stuarts want to use the
human life value method, and they assume that Frank’s personal consumption is 15% of his after-
tax earnings.
5. They want to make arrangements for Lisa’s medical care to be paid in full, which includes any
deductibles or other out-of-pocket expenses.

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6. They want to assist Frank’s parents in their retirement years, as needed.
7. They want to maintain an adequate emergency fund of six months' living expenses.
8. They want to prepare proper wills and an estate plan.
9. They want to create an investment portfolio that will generate their desired rate of return given
their risk tolerance to meet their education and retirement planning goals.
Economic Information
They expect inflation to average 3%.
They expect college education expenses to increase at an annual rate of 5%.
They assume an average 9% after-tax rate of return on all investments.
They expect Frank’s salary to increase 4% annually.
Current rates are 7% for a 15-year fixed mortgage and 7.5% for a 30-year fixed mortgage.
Refinancing will cost 3% of any mortgage as closing costs but will not be included in a new
mortgage. The couple will pay the closing costs from separate funds.
They are in a 25% federal income tax bracket and a 6% state income tax bracket.
Insurance Information
Health Insurance
Health insurance is provided for the immediate family through Lakeside Hospital. Lakeside Hospital’s
health insurance is offered through a preferred provider organization (PPO). The coverage has an
individual deductible of $1,000 and a family deductible of $2,000 per year. If in-network providers are
used, the insured is subject to an 80/20 coinsurance clause. The family annual stop-loss limit is $5,000.
Out-of-network costs may be higher. The health insurance plan has unlimited lifetime benefits for
essential health benefits. Frank’s employer does not offer vision or dental coverage.
Life Insurance
Frank has elected $50,000 group term life insurance through the hospital. The hospital pays the entire
premium as a benefit to Frank. Madelyn has maintained a $10,000 whole life insurance policy her
parents purchased for her as a child. The cash value of the whole life policy is $6,000, and the policy is
paid up.
Disability Insurance
The hospital does not provide disability insurance for its employed physicians. Frank has purchased a
policy through the American Medical Association. The policy provides own-occupation coverage for
disability resulting from either sickness or accident, pays a benefit of 60% of gross pay after an
elimination period of 180 days, covers a term of 60 months, offers a residual disability benefit, and is
guaranteed renewable.
Malpractice Insurance
The hospital provides Frank with malpractice insurance and pays the entire premium. The policy covers
Frank’s work at both the hospital and in the clinical practice.
Homeowners Insurance
The Stuarts have an HO-3 open-perils policy with a personal property endorsement. The policy features
a $500 deductible and an annual premium of $2,000.

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Automobile Insurance
The automobile insurance premium is $2,400 annually. Frank and Madelyn have full coverage on both
cars, including:
$100,000 bodily injury for one person
$300,000 bodily injury for all persons
$50,000 property damage
$100,000 uninsured motorist
$10,000 medical payments
Deductibles are:
- $500 comprehensive
- $1,000 collision
Investment Information (Assumptions)
Investment Expected Return Beta
Small-cap (aggressive) stocks 13.5% 1.7
Growth stocks 10% 1.2
S&P 500 index 9% 1.0
Value stocks 8.5% 0.9
Corporate bonds 6.5% 0.6
Money market (bank) 1.75% 0.2
The Stuarts consider themselves to be moderate-to-high risk investors. They wish to begin an
investment program to meet their education and retirement goals. They have told you that they will be
creating a portfolio that is comprised of 80% S&P 500 index fund, 10% value fund, 5% bonds
(corporate), and 5% money market (bank) to achieve both their risk tolerance and desired rate of return.
Retirement Information
Frank and Madelyn would like to retire on or before age 67. They both expect to live to age 92. They
would like to have a standard of living equal to 70% of Frank’s preretirement income. They want to
include Social Security benefits in the planning process for their retirement. They estimate that their
annual Social Security benefits at age 67 will be $29,820 for Frank and $14,910 for Madelyn (in today’s
dollars). They want to know whether their current plan will allow them to reach their retirement income
objective.
Last year Frank began deferring 7% of salary in a Section 401(k) plan available through Lakeside
Hospital. Under the plan, the hospital matches $.50 for every dollar contributed for a maximum
employer contribution equal to 3% salary. The plan allows for deferrals up to a maximum of 15% of
salary. The couple is assuming a 9% rate of return on invested retirement assets.
Gifts, Estates, Trusts, and Will Information
Neither Frank nor Madelyn has a will. They realize the importance of having a will; however, Frank’s
schedule seems to preclude any time for finalizing one. They are mostly concerned about the children in
the event of the death of one or both of them while the children are still minors. They are interested in
minimizing any estate tax obligation.

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STATEMENT OF CASH FLOWS
Frank and Madelyn Stuart
For the Year Ended December 31, 2013
CASH INFLOWS
Salary—Frank $170,000
Gift from Frank's parents 20,000
Madelyn’s net self-employment income 4,000
Interest 900
Total inflows $194,900
CASH OUTFLOWS
Section 401(k) plan contributions $ 11,900
Mortgage payment (P & I) 20,700
Property taxes (residence) 1,800
FICA and self-employment tax 9,514
Federal income tax withholding 68,000
State income tax withholding 6,734
Utilities 3,980
Disability insurance premium 900
Homeowners insurance premium 2,000
Auto loans 10,789
Auto expense and maintenance 1,200
Auto insurance premium 2,400
Housekeeping service 2,400
Education loan repayment 6,915
Clothing and dry cleaning 5,600
Food 5,750
Entertainment 3,970
Miscellaneous 5,998
Total outflows $170,550
Total cash surplus $ 24,350

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STATEMENT OF FINANCIAL POSITION
Frank and Madelyn Stuart
January 1, 2014
Assets1
Liabilities and Net Worth2
Cash/cash equivalents Liabilities
Checking account JT $2,500 Credit card balances $ 550
Money market3
(1.75%
rate)
JT 5,000 Auto loan (Audi) 25,000
Auto loan (Toyota) 18,000
Total cash/cash equivalents $7,500
Invested assets
CD JT $15,000 Home mortgage $225,000
Section 401(k) plan F 18,000 Student loans 50,500
Cash value of life
insurance
M
6,000
Coin collection F 10,000 Total liabilities $319,050
Total investments
$49,000
Personal use assets Net worth $81,950
House (appraised
7/01/13)4
JT $275,000
Auto (Toyota) JT 22,500
Auto (Audi) JT 47,000
Total personal use $344,500
Total assets $401,000 Total liabilities and net worth $401,000
Note to financial statements
1
Assets are stated at fair market value.
2
Liabilities are stated at principal only and are all joint obligations except the student loans which belong to Frank.
3
The money market account is currently serving as their emergency fund.
4
Land value was determined to be $50,000 and the home value $225,000. Replacement value of the home is also $225,000.
Title designations
JT = Joint tenancy with right of survivorship
F = Frank’s separate property
M = Madelyn’s separate property
The Stuarts primarily use cash, checks, and debit cards for personal expenditures.