Introduction David Kirkbaum was feeling slightly panicked. Up until now, he had felt that he was well positioned for retirement at a reasonable age, while still leaving his wife and son a nest egg once he was gone. David had been careful to take a proactive approach to financial planning, and he was confident that his financial plan covered everything: health insurance, life insurance, investments, retirement, and a college fund for his son. But that was yesterday. Today he'd learned he had overlooked an important and expensive element of his financial plan: providing for the possibility of long-term care. What exactly was long-term care? Would he need it? Did he really need to plan for it? If so, how? David needed to answer these questions because he was determined to have a comfortable retirement and help provide for his wife and son after he died. How could he have overlooked this important part of his financial plan? David planned to retire in 15 years, at the age of 67. Now, he wanted to be confident that he had addressed the potential long-term care needs for both himself and his spouse, who was also his age, in his financial plan. The question was, should he purchase long-term care insurance or self-insure by creating an investment portfolio for this purpose? Long-Term Care--What Is It? Long-term care (LTC) encompassed a variety of services to help meet both the medical and non-medical needs of people with a chronic illness or disability who cannot care for themselves for long periods. LTC was more commonly needed by the elderly, although it may be needed by people of any age. Experts suggested that more than two-thirds of individuals age 65 and older will likely require long-term care (Scism, 2015). Through Internet research and talking with a financial planner, David learned that the two primary solutions for funding long-term care were to purchase long-term care insurance (LTCI), or to self-insure by investing on his own for long-term care needs. He was not sure of the costs and benefits of purchasing long-term care insurance compared with the costs and benefits of self-insuring, but he needed to decide whether to purchase LTCI or self-insure. Costs and Benefits While the different options varied in cost, all were expensive. The median annual price of a private nursing-home room was around $90,000 (Scism, 2015). Basic insurance did not cover the cost of long-term care for most individuals, with the exception of those receiving some form of government-sponsored Medicaid, or--for a limited number of days--covered under Medicare. LTCI, on the other hand, provided at least some coverage for long-term care needs. Individuals usually decided to purchase LTCI policies when they were in their 50s, 60s, or 70s, and paid into the policy for 10, 20, or 30 years. The younger the policyholder was when he or she started a policy, the lower the premium. Younger policyholders, of course, paid premiums for more years. Individuals who waited to purchase LTCI paid higher premiums and faced increased risk that a policy could be denied or cost more because of age-related medical disorders such as diabetes, high blood pressure, osteoporosis, or other conditions. LTCI was expensive, but not having it could be financially devastating should LTC become necessary. The uncertainty of whether one would ever need the policy created a dilemma for most people considering LTCI. It was possible that an individual could pay premiums for years, and then die suddenly and not need the policy; or that the individual could stay healthy and have the policy go unused. In either case, the benefit from the premium would be lost, resulting in no return for all of the dollars spent. Another uncertainty was that the federal government allowed the insurance industry to change premium amounts over time. While an individual might start paying for the insurance in his or her 50s, there was no guarantee the premium would remain the same as the individual aged. …

Introduction So, do we have a looming problem, or problems, here? Jason's utilization is trending down while Jennifer's has consistently approached the highest in the office, often exceeding 100 percent. What is the story, Joy? Mitch Mainhardt, the Seattle office managing partner for Kershawn Taylor, a global network of professional firms providing audit, advisory, and tax services, was meeting with Joy Johnson to discuss audit staffing after having reviewed a six-month summary of monthly staff utilization reports. Joy Johnson was a senior audit manager. They were discussing Jason and Jennifer, two staff accountants on one of her recent audits. Formal staff performance reviews were due in a few weeks, and Mitch prided himself on staying on top of staff performance, development, and retention. After all, he was ultimately responsible for hiring and developing the professionals in his office, and he appreciated the importance and challenges of staff recruiting, development, productivity, and retention. Mitch understood that the utilization metric could be a valuable pointer to the need for management intervention. Were the staff utilization metrics of either Jason or Jennifer, or both of them, pointing to a need for management intervention of some sort? Staff Utilization--What Is It? The staff utilization metric was derived as one way to evaluate the workload and potential economic contribution of a staff member to a professional services firm. Typically, it was derived by dividing the number of billable hours in a week by the number of hours in a normal work week. If a normal work week was comprised of eight hours per day, Monday through Friday, the denominator was 40 hours. For periods longer than one week, the numerator was the staff member's billable hours for the period, and the denominator was the number of weekdays in the period multiplied by eight hours per day. In many accounting firms, utilization expectations were scaled by position. Staff and senior accountants were expected to maintain a 90 percent or greater utilization rate. Managers, due to increasing responsibilities, were expected to achieve a utilization rate between 75 and 80 percent; and partners were expected to achieve a utilization rate of 60 percent or less, depending on administrative or other responsibilities. Managers assumed more planning, staff mentoring, and client relationship responsibilities. Partners were responsible for building relationships with potential and existing clients, and carried an increased responsibility for professional service such as assuming leadership positions in civic and professional organizations. Why It Matters Mitch considered potential issues that might be indicated by the utilization report and reviewed his framework for utilization with Joy. When I think of utilization, I like to put it in the context of inputs, outputs, and metrics. Inputs represent skills and behavioral attributes that a person brings to the job. Outputs represent the quality and quantity of the product produced. Utilization is a metric that can provide insight, as an indicator, into the input and output factors. If the inputs and outputs of a staff member are high, then everybody wants that person on his or her jobs. Consequently, that staff person's utilization will be high. Conversely, if a staff person had issues in one or more of the input or output measures, then that person's attractiveness, when it comes to staffing jobs, decreases and his or her utilization likely declines. I see utilization as a metric that helps me identify a staff person who might be experiencing difficulties in one or more of the input or output measures. Joy, do you have any observations regarding Jason or Jennifer? The Big Picture--An Early Investment in Future Schedule Flexibility As Joy considered both Mitch's observation and question, she couldn't help but think about the accounting profession's age-old question of work-life balance. …

Cost and prices, time for the What should do? A few weeks ago Karen Faulkner finalized the purchase of a bakery which specialized in bread. The prior owner had decided to sell the business because it lacked profitability. There were plenty of customers which suggested to Karen that the problem was with costs or pricing. The last price increase on any of the products was in 2002, ten years ago. Karen thought she could turn things around and would start by repricing her products. This isn't a hobby, it's a business and if don't get this right, there won't be a store. Karen was overwhelmed, but she decided to start by repricing the signature product--the honey wheat loaf. I'll start with the honey wheat loaf; it will be a 'pricing beta test'. Notes and numbers were spread out on the table so that Karen could figure out costs and margins. Once she estimated cost, the difficult decision would be to decide on a price. A loaf of honey wheat still sold for $5.25. If the price needed to increase, what was the best price? What price would cover costs and keep customers buying loaves? Was it better to raise prices incrementally or all at once to avoid sticker shock? The Ingredients Karen was a graduate of a local college of business. She put her degree to use in a variety of ventures. Karen had owned a business in the past inspecting homes. She was comfortable owning and running a business and thought a better pricing strategy could turn the bakery around. The bakery was located in a medium-sized community with a stable economy supported by employment at the local university. The bakery was located downtown and served a lunch crowd from the nearby high school and businesses. The building was next to a small plaza where customers could sit outside for lunch. There were also tables at the front of the bakery. The atmosphere was friendly and the scent of baking bread filled the shop. The bread store was well known and liked in the community. It was perceived as selling healthy, high-quality foods; it sold a premium product. Schools visited on field trips and the free samples drew visitors. If asked to describe her customers, Karen said, I think of them as shoppers like me; aware of quality and willing to pay a little more for something healthy with no preservatives. The Mix Karen knew she had to price the bread based on what the market would pay, but she also knew she needed to make sure the price was high enough to sustain her business. It made sense to her to use a spreadsheet to estimate costs and contribution margins. Time to do the numbers. Karen decided to estimate the cost of goods sold and contribution margin for both 2002 and 2012. She made a list of the ingredients in her loaf and their costs as of 2002. Honey, wheat, salt, yeast, and water were the bread's ingredients. It seemed simple but it wasn't. One batch of bread that made 48 loaves and required 56 pounds of wheat, 12 pounds of honey, 0.4 pounds of salt and three pounds of yeast. In 2002, honey was $1.32 a pound, salt $4.15 a pound, yeast $1.64 a pound, and wheat was $0.17 a pound. It cost $8.50 an hour for labor. Were there other costs she needed to include: packaging and overhead? Prices had risen significantly for everything except yeast in the ten years between 2002 and 2012. Honey was now $4.02 a pound, salt $7.47 a pound, yeast was $0.98 per pound and wheat was $0.30 per pound. Wages hadn't changed at $8.50 per hour. A batch of bread needed a half hour of labor to mix the batter. While employees needed to be around when the bread rose and baked, employees usually did other work during this time and she decided to allocate only 0.5 hours labor per batch of bread. The variable costs could and did change over time, but their variability made it difficult to forecast their values in the future. Karen wondered how or even if she should somehow incorporate this uncertainty into her calculations and decision. …

A heart attack, really? At 49 years old, Mark Smith was having chest pains. Coronary problems were common in his family and he thought for sure he was having a heart attack. Luckily, it turned out that Mark didn't have a heart attack, but it was a wakeup call, and among other things, Mark thought it was time he considered life insurance. He thought he had done everything right with his financial plan, but life insurance, one key part, was missing and that could be critical to his family's future. Where to start? Background Married with one 14-year-old child, Mark Smith wondered if he had enough life insurance to take care of his family and support their life if anything happened to him. Would his 49-year-old wife have the means to support herself and their 14-year-old son? What did they spend now and what would they need in the future if Mark was not around providing a paycheck, health insurance and other benefits? Mark realized that the decision to buy insurance was just the beginning. How much insurance, what kind, and what price? Now, and in the future, his family depended on him to get the answers right. Maybe the easiest way was to begin with what his family might need if he was gone by working through the numbers of the income and expense his family might face if he died. Paying for a Life Sometimes life was about the numbers. How much did we have? How much did we need? What might be the unexpected events that affect our plans and finances? Death was a big one and just thinking about it was tough. Mark found an article by Lankford (2010) covering the basics about how to handle different life events that affect insurance. For instance, the article stated that upon marriage one should review life and other insurance coverage. Mark had not done this and luckily nothing bad had happened, one bullet dodged. Life stages and changes like divorce, the birth of a child or a change in jobs affected personal finance and were supposed to trigger a review of the big picture. Sometimes life just got away from you, but now it was time to do what he should have done with the birth of his son 14 years ago or at his last job change. No more putting it off; it was time to plan for the unthinkable. Mark decided to start by coming up with specific numbers to help him decide how much money his family would need if he were gone. This meant he needed to think about everything; the retirement dollars he already had, savings and investments and benefits from his job. Mark figured his wife would be eligible to begin withdrawing from his retirement account at about 60 years of age. She too was 49, so that was 11 years away. As of today he had $700,000 in retirement. Mark made investment decisions in the past and felt comfortable he understood his choices, risk tolerance and how to allocate his assets among investment categories. He would not consider himself an expert investor, but the choices he made gave him the confidence to continue his strategy. He expected the retirement account would grow at five percent per year. His salary was about $100,000 per year. The remaining mortgage on his house was $40,000 and his house would be paid off in four years. Mark and his wife were financially conservative and there was no other debt, only the house payment. His 14-year-old son had four years before he would be old enough to start college and Mark estimated it would cost $60,000 a year. They had already saved $20,000 for that goal. Mark's wife worked part-time and brought in an additional $10,000 per year. Mark expected a funeral to cost about $10,000. His life insurance policy at work would pay out one year in salary if anything happened to him so there was $100,000 in life insurance already. Was that enough to cover expenses and take care of his family? He and his wife were savers and with the house paid off, he expected she could live on $50,000 per year or less but maybe that number could change if his son went to graduate school or if any number of unexpected circumstances changed his family's annual expenses. …

Introduction Emma McCallister sat at her kitchen table reflecting on her life. Bank statements, bills, statements from retirement accounts and a printout of her credit card Spend Analyzer were all neatly piled in stacks. It was over a year since her husband died and now it was time to develop a budget and plan for the future. She was told the place to start was with a balance sheet that listed her assets and liabilities and a cash flow statement that detailed her monthly income and expenses. From there she needed to develop a budget for the future. Like many couples, Emma and her husband Paul did not have a formal plan or budget. He earned far more than she did, but with both their incomes they had enough to pay the bills with some left over every month. They knew they needed to develop a budget and make a plan so they could retire sooner rather than later, but then Paul died and Emma was left on her own. At 61, Emma had six more years before she could collect Paul's $3,300 and her $987 a month in Social Security. Emma wasn't sure if the proceeds from the insurance policy and the balances in Certificate of Deposits (CD), banking and investment account would be enough both to fund retirement and cover monthly living expenses while she was working before retirement. It was hard for Emma to think about her life expectancy given her husband's death at an early age, but most in her family lived into their middle to late eighties. That meant thinking about life after age sixty-seven. Having retirement investments to supplement the amounts she currently had would mean figuring out how to use her assets. Spending or saving and investing were big decisions. Emma planned to stay in the house in the near future but the lawn, the multiple levels and bedrooms represented space she usually didn't use unless her children and grandchildren came to visit a few times a year. The house would be difficult to sell because of its memories. Assets and Liabilities Emma had all the documents and all the numbers from the last year but putting them together into a balance sheet and personal income or cash flow statement was a challenge. Although she was clear on the concept of assets and liabilities, Emma wondered if she had overlooked something. The income statement was important too and Emma knew expenses were bigger than income each month now that her husband's income was gone. Some expenses were fixed or could be broken down from annual or semi-annual amounts into a monthly allocation. Other items were variable and represented places where she might more quickly cut back. Then there was the issue of saving versus spending. Did she need to reduce her spending, and if so, by how much and what would she cut? Should assets be invested or should she liquidate them and use the proceeds to pay down debt? The house had dropped in value, but was it better to stay or sell? It was frustrating and scary to think about all the issues. Emma knew the place to start was by looking at where she was now after she had a year of data from living on her own. Emma had a pile of financial information. The house had been worth more but its value fell after 2008. The appraised value for property tax purposes was $180,000 and there was $152,735 left to pay off. Emma did have the option of selling her house and if she did so she expected rent would be about $500 per month. The contents of the house were worth around $162,000, a number recently developed with the help of the insurance agent as Emma reviewed her coverage. Other than the mortgage, there wasn't any debt. Emma used some of the insurance money to pay off credit card debt. Paul's student loan debt, which he incurred later in life when he went back to graduate school so he could successfully switch to a new career, was forgiven and the car was paid off. With 180,000 miles on the car, it probably didn't have much book value and Emma worried she might need to replace it or make some major repairs in the near future. …

Should David convert? Was converting from a regular to a Roth IRA a good idea? David Peltier had a regular IRA as part of his retirement financial planning. This was in addition to his investments in a 401(k) through work. Reading about the Roth IRA convinced David he needed to consider a possible switch of some or all of his money from a traditional to a Roth IRA. If a Roth IRA was a good idea, should all the money in his IRAs be switched? Clearly, I need to do some research and make some calculations, thought David, as he sat down at his desk. Traditional, Rollover and Roth IRAs Traditional individual retirement accounts (IRAs) gave tax advantages to encourage savings. The traditional IRA had a contribution limit of $5,000. The amount of money contributed into a traditional IRA, up to $5,000, reduced adjusted gross income (AGI) and lowered taxes. At retirement, the individual would pay taxes on withdrawals when presumably income was lower. Funds in this kind of IRA grew tax free until retirement. Taxes were due on any money withdrawn after retirement. There were limits on withdrawals. Withdrawing money from the IRA before age 59 1/2 may result in a penalty. There were also rules about required withdrawals. An individual had to make at least minimum annual withdrawals after the age 70. The size of the withdrawal was dictated by the government based on the amount in the fund and the age of the IRA account holder. There was also something called a rollover IRA. When an employee left a company the employee had the opportunity to take his or her retirement. Normally, the individual would complete paperwork moving the funds to a rollover IRA at a financial institution of his or her choosing. Then, when the individual started a new job there was the option to move those funds into the new retirement plan. Alternatively, the individual could keep the funds in the rollover IRA until retirement. The same rules applied as with a traditional IRA. The person could not take funds from the IRA before age 59 1/2 without paying a penalty and the person had to make at least minimum withdraws after age 70. Roth IRAs were different from traditional or rollover IRAs. Roth IRAs were not tax deductible, meaning the individual could not reduce taxable income by the amount placed into the Roth IRA. Qualified distributions at the time of retirement were tax free. There was no requirement forcing individuals to make minimum annual withdrawals at age 70, which many viewed as an advantage. That meant the Roth IRA could continue to grow. Funds in a Roth IRA could be inherited by a beneficiary. The person inheriting the Roth was required to make minimum withdrawals as dictated by the government but would not have to pay income taxes on the inherited amounts, although estate taxes might apply. The tax issues associated with IRAs and Roth IRAs were important, although an investor had to decide years in advance whether his or her circumstances would make one or the other type of IRA advantageous. Roth IRA Conversions Recent changes in tax laws created an opportunity for those with traditional IRAs to make conversions with a more favorable tax treatment. David realized the importance of reevaluating his investments on a regular basis and the change in the tax regulations caught his attention. The government passed a rule allowing individuals to convert all or a part of their traditional and rollover IRAs into Roth IRAs. In the year of conversion, the person treated the amount converted as taxable income. After conversion, the money would follow the regular Roth IRA rules. This complicated the decision to convert because there was an immediate tax on the converted amount, but the benefit of the Roth IRA was future tax-free withdraws. It all seemed to boil down to taxes, present and future. The tax benefit from a Roth IRA accrued at retirement. Retiring with the kind of income that meant a higher tax bracket made the Roth IRA an attractive alternative. …

Is there any money in this? It all started with that simple question one evening in March 2009 while James Wilson and his wife Karen sat down to a family dinner. Karen's father, Tom Anderson, owned and operated several assisted living facilities in the community and region. You could buy one of my facilities. It is already built and the cash flows are in place. have experience in the business and it would be great to sell to you. Tom was enthusiastic about the business and it was something James and Karen had thought about in the past. It might be a great opportunity but James was completing an undergraduate business degree at the local university so it came down to timing and money. Tom, Karen and James quickly sketched out some numbers on a napkin but James knew it would take more than that to figure out whether or not this opportunity was viable. James never would have thought about assisted living as an opportunity for a business if not for Karen's dad. James thought his father-in-law's facilities were great but it quickly became apparent that the price tag was too high for someone just getting started as an entrepreneur. As James and Karen drove home from dinner they talked about the idea. I know your dad has a great business, but want to think about something a little different. The typical assisted living facility is designed mostly for those who can afford to pay for their own care. know there are a couple of rooms set aside for Medicaid residents but it seems like they are second-class citizens. What if we did something more? What if we designed a facility with Medicaid in mind? We could figure out a way to build and run the facility at a lower cost which would let us target a group of people who are underserved by current facilities. We could still take private pay residents but lower costs would give us an advantage there too. Karen could tell James was enthusiastic and more than a little nervous about the idea. Let's try to figure it out, James. Maybe we can find a way to make this work. Maybe we can make it pay. James thought it might be hard to get the financing he needed. Potential investors and lenders were more wary of new projects now that there was a recession and credit crunch. James knew his idea to target Medicaid clients was unique. He wondered why no one else designed facilities for Medicaid. Why just a couple rooms for this group? Private pay patients brought in more money but James was intrigued with the idea that he could both help others and make money. A 1998 Boston Consulting Group study recognized the poorer demographic could be a viable market but it was underserved. Understanding the market and the numbers were important. Investors and lenders would want to see if the cash flows from a facility targeted toward Medicaid residents could make money. James knew he needed to find out more information about the market and develop some pro forma financial statements. Getting the numbers and information ready was much the same as a high-stakes term paper. As an entrepreneur, James knew he would need to research his idea, determine if there was an underserved market and then decide whether the financial payoff was worth the effort. James did not want to involve partners or investors who might not share his vision for the facility. He would need to convince himself that this was a good idea then he would need to convince a bank. James's Background James and his family and Karen and her family had a long history in the community. At the age of eight James started working in his dad's family landscaping business. By the time he was in college James was installing landscaping, providing repair service for the company and managing the work crews. His dad was a great example of an entrepreneur who built and nurtured a thriving business. Although it didn't always feel like a benefit, family could work and help out. James now knew that his work experience with his dad was the real world complement to his business degree. …

Was it time? Was it time to buy a foreclosure rental property? Jim already owned one rental property in a college community but investing in a foreclosure property was something new for Jim. The prospect of purchasing a foreclosure property was appealing. Real estate prices were down across the country. An increasing number of foreclosed properties were for sale in the local market. Could Jim pick one up for a great price? And what about risks? The market could continue to decline, and what looked like a value might not be. Any home Jim bought would not be his primary residence. Instead he and his wife would rent the property. The rental market could change and the estimated cash flows might not materialize. Foreclosure presented another obstacle as well; it was a bidding process that required cash funds. Jim had the cash available and his decision ultimately came down to getting the price for a property. Determining the right price for the property involved assessing the appropriate cash flows, estimating a cost of capital and assessing the risks associated with his cash flow estimates. Jim lived in a small university town in Idaho. He owned his primary residence in an area of town known as upper university. The area was up a gentle hill from the main campus of a regional university. All of the houses in this area were within a ten minute walk from campus. The other area close to campus was called lower university and Jim owned a rental here. It too was within a ten minute walk from campus. Jim was a professor on campus and liked having his rental close to his primary residence. It made it easier to keep an eye on the property. It also saved time when he had to stop by to make a repair. Jim's rental property had stable, longer term tenants. Jim had been looking around for another rental but appropriate homes for sales were scarce in the university areas. Jim was very interested when he noticed a foreclosure for sale about a block from his current rental property. The U.S. Housing Market Jim had a great experience so far with his rental but he knew markets and the economy can change. Investing in a second rental was a big step. Jim had moved to Idaho from Las Vegas the year before, in the summer of 2007. Jim's house in Las Vegas sold, but at a price lower than he wanted. Jim quickly realized his sale in the Las Vegas market was actually well-timed because the real estate bubble had already been starting to burst. The housing market seemed stronger in Idaho, and Jim bought his first rental when he moved. Now that he was thinking about buying another rental, Jim realized there were some changes in the U.S. housing market in the summer of 2008 he needed to consider. Jim kept abreast of the news and heard a radio show describe how in the summer of 2008 the national real estate market was beginning to collapse. There was a run on Bear Stearns and the Federal Reserve had lowered interest rates to combat a subprime lending crisis. The news story described how this crisis occurred after several years of relaxed bank lending practices. Investors were interested in high interest, low risk bonds, and historically mortgage backed securities issued in the United States were just that. With high demand for mortgaged backed securities, mortgage companies began making riskier loans to create more securities. In an effort to increase loans, mortgage companies made loans without verifying income. They were called no income verification loans and were popular. In a no income verification loan the borrower needed only to state his or her income. For due diligence, the banks had an expert state that it was possible for someone in the profession of the borrower to make the income the borrower claimed. In addition, many loans were made with nothing, or little down. The decline in housing prices in some parts of the country started back in 2006. By 2008 the consensus was that the U.S. real estate bubble had popped. …