Mario Garcia

• 26 years old.
• Employed at a computer store as a salesperson and trainer. He has been employed with this company for five years.

Gretchen Garcia

• 26 years old.
• Is a German citizen and is employed as a floral designer for a local florist.

Mario and Gretchen Garcia

• Mario and Gretchen have been married for two years.
• They have one child, Ursula (age one).

Mario’s Parents

• Mario’s parents, Francisco and Ramona, are fairly well off and live in Idaho. They own all of their property as community property. They have known Gretchen for a long time and any gift that they make will be to both Mario and Gretchen. Francisco and Ramona have made no previous taxable gifts.
• The Garcias expect Mario’s parents either to lend interest free or to give them a $30,000 down payment (27% of the purchase price) to purchase a house.

Personal and Financial Information and Objectives

• Mario wants to start his own business in ten years. In the meantime, he plans to advance in his current job. He wants to open a business similar to his current employer’s and expects he’ll need $100,000 in today’s dollars to start the company.
• They want to buy a house in the price range of $110,000. They expect taxes and homeowners insurance to average $200 per month in total.
• They like to take vacations (twice a year) with an average cost of $2,250 per vacation. Mario and Gretchen also love to go out with friends or entertain weekly.
• They plan to retire in 30 years and expect that $50,000 per year (in today’s dollars) would be sufficient during retirement.
• They expect raises to average 3.5% over their remaining work life expectancy.
• They both expect to live until age 90.

Insurance Data

• Mario’s health insurance is paid by the employer. Gretchen and Ursula are dependents under Mario’s policy. Coverage is for major medical with a $500,000 lifetime limit on an 80/20 basis; maternity coverage also has 80/20.
• Dental coverage is not provided by Mario’s employer.
• Neither Mario nor Gretchen has disability insurance.
• Mario has a $50,000 group term life insurance policy paid for by his employer. The beneficiary is Gretchen.
• The couple’s automobile insurance costs $1,000 annually for both vehicles. Bodily damage and property damage are $10,000/$25,000/$5,000 for each vehicle. Comprehensive has a $250 deductible, and collision has a $500 deductible.
• The couple has renters’ insurance with a contents coverage total of $35,000. The premium is $600 annually. The policy has a deductible of $250, covers $1,000 per person for medical payments, and has $100,000 liability coverage.

Economic Information

• Expected inflation will average 3.5% (CPI) annually.
• Expected return for the S&P 500 Index is 11%.
• T-Bills are currently yielding 5%. The long-term riskless rate is 7% (Treasury Bonds).
• Current mortgage rates are:
  Fixed, 15-year mortgage: 7.5%
  Fixed, 30-year mortgage: 8.0%
• Home closing costs are expected to be 3% of any mortgage.
• Savings accounts currently yield 1.5% annually, compounded monthly.
• Certificates of Deposit are currently yielding 5% for 1 year.
• Unemployment is currently 6%.

Investment Information

Both Mario and Gretchen have a high tolerance for risk. They have a balance of $3,840 in Mario’s 401(k) plan provided by his employer. He is currently deferring 4% of his salary, and the plan allows him to defer up to 10%. The 401(k) plan offers a variety of mutual funds ranging from aggressive growth stock funds to Treasury money market funds. Derek currently has 100% invested in the growth fund.

Several years ago, Mario’s grandfather gave him URS stock. The fair market value at the date of the gift was $6,000. Mario’s grandfather originally paid $2,000 for the stock and paid gift tax of $600 on the gift.

The Garcias’ required rate of return for investments is 1% below the S&P 500 Index return.

Income Tax Information

Mario and Gretchen file a joint tax return. Their total tax rate including payroll is 24.65% (federal income tax average rate is 15%; state income tax amounts to 2% each year; FICA taxes amount to 7.65%).

Retirement Information

Mario is a participant in his employer’s 401(k) plan. The 401(k) plan has a two to six year graduated vesting schedule. The company has made matching contributions of $1,500, which is included in Mario’s 401(k) balance above. The balance also includes $1,500 of contributions by Derek and prorated earnings of $840. The plan is not top heavy.

Gretchen and Mario each contributed $2,000 to an IRA last year.

Gifts, Estates, Trusts, and Will Information

Mario and Gretchen have simple handwritten wills leaving all probate assets to each other.

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