The Retirement Decision

Abstract

CASE DESCRIPTION Time value of money is the primary subject matter of this case. Students are asked to apply time value of money techniques in a retirement planning scenario. Thus, they will be able to see a practical application of present and future value concepts. The case is appropriate for the first undergraduate course in financial management. It can also be used in a graduate survey course. The case is designed to be covered in one 50-minute class period and will likely require 2-3 hours of outside student preparation. Familiarity with a financial function calculator could significantly reduce students' preparation time. CASE SYNOPSIS Jim Abbott, an Executive Vice President of Bank USA, has just learned that his employer has entered into merger discussions with a large bank conglomerate. If the deal is consummated, Jim will be required to relocate and will likely have a change in his job responsibility and reporting relationship. Jim and his wife Mary have recently completed the construction of a multi-million dollar home on the lake. They are extremely active in the community so the prospects of relocating are unappealing. Accordingly, they've scheduled a meeting with Rick Johnson and Mike Davis of Wealth Management, Inc. to assess their finances and to determine if Jim is in position to retire one year from now if the merger is affected. INTRODUCTION Jim Abbott started his career with Bank USA in 1970 as a Management Trainee. He had a natural affinity for banking and quickly moved up through the ranks. He served as a Branch Manager for several years and achieved substantial annual increases in branch deposits, loans and profitability. Jim was labeled as an up-and-comer. He was promoted to City Executive. In this position, Jim was responsible for all branch activity in Charlotte, NC. A few years later, he was promoted to Regional Executive where he managed all branches in the Piedmont Region of North Carolina. Jim possessed a unique combination of analytical and people skills. He moved through a series of management positions at Bank USA's headquarters. Ultimately, Jim was named Chief Risk Officer. In this position, he reported directly to the Chairman of Bank USA. Jim's income increased substantially over the years. He now earns a base salary of $300,000 per year. In addition, he participates in two management incentive programs--short-term and long-term. Each results in an annual bonus dependent on the attainment of corporate goals adopted by the Board of Directors. Bank USA has been very successful in meeting corporate goals. Accordingly, it has not been uncommon for Jim to receive annual bonuses totaling $3-400,000. Jim has the option to defer some or all of the bonuses. This is an annual election. In the early years, he deferred bonuses. More recently, he received bonuses in the current year in order to pay for the construction of his house. Jim has elected to defer $25,000 of the bonus to be received six months from now. The remainder will be used for construction related costs, home furnishings and new cars. His residence has a market value of $2.5 million. There is no mortgage balance. Jim also participates in various stock option and employee stock purchase programs. He has acquired a substantial number of shares of Bank USA and has options to acquire additional shares. He participates in both qualified and nonqualified retirement plans. The qualified plans include a regular retirement plan and a company savings plan (401(k)). Bank USA makes 100% of the contribution to the regular retirement plan. Jim will receive a retirement benefit based on the accumulated account balance. The company will contribute $18,000 to Jim's account one year from now. Jim contributes 8% of his base salary to the company savings plan. The company matches the first 6% of his salary dollar for dollar. Contributions are made to the company savings plan at the end of each calendar quarter. …

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 85 citations exist upstream.