***Please check for additional questions related to this material. I am posting 1 question per post and there are 20 questions in total.

***Please check for additional questions related to this material. I am posting 1 question per post and there are 20 questions in total. The information needed to answer the question is at the bottom of this page.***

Question

16. What potential risks does Jill face under her current investment strategy for retirement? Select your response and justify your answer.

a) Inflation/purchasing-power risk

b) Interest rate risk

c) Both A and B

d) Neither A nor B 

______________

Jill Thompson

Personal Data

Client:                                      Jill Thompson, age 50, Accountant, divorced

Children:                                Dorothy, age 14

Jill’s parents:                       Mother, age 78, terminally ill; father, deceased

Financial Data

Primary residence (Jill’s)…………………………………………………………………..$500,000

Mortgage on primary residence……………………………………………………  .$305,000

Cash account (Jill)…………………………………………………………………………………$6,000

Cash account (Mother)………………………………………………………………………..$1,000

Jill’s 401(k)…………………………………………………………………………………… ..$125,000

Jill’s IRA………………………………………………………………………………………………$50,000

Jill’s investment account…………………………………………………………………….$75,000

Jill’s automobile…………………………………………………………………………………$24,000

Jill’s credit card debt…………………………………………………………………………..$18,000

Income/Expense Data

Jill’s income…………………………………………………………………………………………$125,000

Jill’s investment income………………………………………………………………………….$6,500

Child Support for Dorothy (monthly)……………………………………………………..$1,000

Family monthly expenses (excluding mortgage & taxes)…………………………$7,500

Other Pertinent Information

·      Jill has been divorced from Dorothy’s father for five years.

·      Jill’s mother is in a nursing home and is terminally ill. She is expected to live only 2-4 months. She has no remaining assets besides her small bank account and is currently on Medicaid.

·      Jill owns a $500,000 term life insurance policy on her mother (it was given to Jill six years ago by her mother) and she has named herself as beneficiary.

·      Jill has a will that leaves everything outright to Dorothy. She has a power-of-attorney and health care power-of-attorney that names her mother as attorney-in-fact.

·      Jill’s mother has a will that leaves everything to Jill and a power-of-attorney and health care power-of-attorney that names Jill as attorney-in-fact with no successor.

·      Jill states that she is extremely conservative and her investment account is almost entirely invested in fixed income investments.

·      Jill contributes $12,000 each year to her 401(k). She wants to contribute the maximum.

·      Dorothy is the beneficiary of Jill’s 401(k).

·      Jill has a $500,000 20-year term life insurance that she took out three years ago; Dorothy is the beneficiary.

·      Jill has a disability insurance policy paid by her employer that provides 60% of her income up to a maximum of $7,000/month; the policy has a 90-day elimination period and provides benefits until age 67; the policy provides benefits if Jill is unable to perform the duties of any occupation for which she is reasonably qualified by education, training, and experience.

·      The primary residence mortgage is a 30-year fixed loan and was taken out 1 year ago at 4.75%. $100,000 of these proceeds were part of a cash-out refinance that was spent on high quality medical treatment for her mother last year while Jill was fully supporting her mother.

·      Jill is currently paying a 20.99% annual interest rate on her credit card debt.

Goals

1.             Provide an adequate quality of life for Jill’s mother in her final months.

2.             Begin developing a college fund for Dorothy.

3.             Begin planning for future retirement.

Economic Environment

The economy has been in recession for several years. Current inflation, as measured by the CPI, is at 1.1%. 90-day T-bill/money market rates are currently at 1%. Long-term government bonds are yielding 3%. Economic growth was 2.5% last year and unemployment is at 5.2%. Interest rates are expected to be flat in the near future. Economic growth is expected to improve in the coming years.