11.1 The Woodsons Struggle with Two Investment Goals LG6 Like many married couples, Damian and Brandi Woodson are trying their best to save for two important investment objectives: . (1) an education fund to put their two children through college, and . (2) a retirement nest egg for themselves. They want to set aside $100,000 per child by the time each one starts college. Given that their children are now 10 and 12 years old, Damian and Brandi have 6 years remaining for one child and 8 for the other. As far as their retirement plans are concerned, the Woodsons both hope to retire in 20 years, when they reach age 65 Both Damian and Brandi work, and together, they currently earn about $90,000 a year. The Woodsons started a college fund some years ago by investing $6,000 a year in bank CDs. That fund is now worth $65,000. They also have $50,000 that they received from an inheritance invested in several mutual funds and another $20,000 in a tax-sheltered retirement account. Damian and Brandi believe that they'll be able to continue putting away $6,000 a year for the next 20 years. In fact, Brandi thinks they'll be able to put away even more, particularly after the children are out of school. The Woodsons are fairly conservative investors and feel they can probably earn about 6 percent on their money. (Ignore taxes for the purpose of this exercise.) Critical Thinking Questions 1. Use Worksheet 11.1 to determine whether the Woodsons have enough money right now to meet their children's educational needs. That is, will the $65,000 they've accumulated so far be enough to put their children through school, given they can invest their money at 6 percent? Remember, they want to have $100,000 set aside for each child by the time each one starts college. 2. Regarding their retirement nest egg, assume that no additions are made to either the $50,000 they now have in mutual funds or to the $20,000 in the retirement account. How much would these investments be worth in 20 years, given that they can earn 6 percent? 3. Now, if the Woodsons can invest $6,000 a year for the next 20 years and apply all of that to their retirement nest egg, how much would they be able to accumulate given their 6 percent rate of return? 4. How do you think the Woodsons are doing with regard to meeting their twin investment objectives? Explain. DETERMINING AMOUNT OF INVESTMENT CAPITAL Financial goal: To accumulate $330,000 in 18 years for the purpose of meeting the cost of daughter's college education. 330,000 1. Targeted Financial Goal (see Note 1) 2. Projected Average Return on Investments A. Finding a Lump Sum Investment: 3. Future Value Factor, from Appendix A based on _years to target date and a projected average return on investment of % 0.000 4. Required Lump Sum Investment line 1 + line 3 B. Making a Series of Investments over Time: 5. Amount of Initial Investment, if any (see Note 2) # 10,000 6. Future Value Factor, from Appendix A based on_18_years of target date and a projected average return on investment of_6% 2.854 7. Terminal Value of Initial Investment line 5x line 6 28,540 301.460 8. Balance to come from Savings Plan line 1-line 7 9. Future Value Annuity Factor, from Appendix B based on_18_ years to target date and a projected average return on investment of_6% 10. Series of Annual Investments Required over Time line 8-line 9 30.906 # 9.754 Note 1: The "targeted financial goal is the amount of money you want to accumulate by some target date in the future. Note 2: If you're starting from scratch-that is, there is no initial investment-enter zero on line 5, skip lines 6 and 7, and then use the total targeted financial goal (from line 1) as the amount to be funded from a savings plan; now proceed with the rest of the worksheet. 11.1 The Woodsons Struggle with Two Investment Goals LG6 Like many married couples, Damian and Brandi Woodson are trying their best to save for two important investment objectives: . (1) an education fund to put their two children through college, and . (2) a retirement nest egg for themselves. They want to set aside $100,000 per child by the time each one starts college. Given that their children are now 10 and 12 years old, Damian and Brandi have 6 years remaining for one child and 8 for the other. As far as their retirement plans are concerned, the Woodsons both hope to retire in 20 years, when they reach age 65 Both Damian and Brandi work, and together, they currently earn about $90,000 a year. The Woodsons started a college fund some years ago by investing $6,000 a year in bank CDs. That fund is now worth $65,000. They also have $50,000 that they received from an inheritance invested in several mutual funds and another $20,000 in a tax-sheltered retirement account. Damian and Brandi believe that they'll be able to continue putting away $6,000 a year for the next 20 years. In fact, Brandi thinks they'll be able to put away even more, particularly after the children are out of school. The Woodsons are fairly conservative investors and feel they can probably earn about 6 percent on their money. (Ignore taxes for the purpose of this exercise.) Critical Thinking Questions 1. Use Worksheet 11.1 to determine whether the Woodsons have enough money right now to meet their children's educational needs. That is, will the $65,000 they've accumulated so far be enough to put their children through school, given they can invest their money at 6 percent? Remember, they want to have $100,000 set aside for each child by the time each one starts college. 2. Regarding their retirement nest egg, assume that no additions are made to either the $50,000 they now have in mutual funds or to the $20,000 in the retirement account. How much would these investments be worth in 20 years, given that they can earn 6 percent? 3. Now, if the Woodsons can invest $6,000 a year for the next 20 years and apply all of that to their retirement nest egg, how much would they be able to accumulate given their 6 percent rate of return? 4. How do you think the Woodsons are doing with regard to meeting their twin investment objectives? Explain. DETERMINING AMOUNT OF INVESTMENT CAPITAL Financial goal: To accumulate $330,000 in 18 years for the purpose of meeting the cost of daughter's college education. 330,000 1. Targeted Financial Goal (see Note 1) 2. Projected Average Return on Investments A. Finding a Lump Sum Investment: 3. Future Value Factor, from Appendix A based on _years to target date and a projected average return on investment of % 0.000 4. Required Lump Sum Investment line 1 + line 3 B. Making a Series of Investments over Time: 5. Amount of Initial Investment, if any (see Note 2) # 10,000 6. Future Value Factor, from Appendix A based on_18_years of target date and a projected average return on investment of_6% 2.854 7. Terminal Value of Initial Investment line 5x line 6 28,540 301.460 8. Balance to come from Savings Plan line 1-line 7 9. Future Value Annuity Factor, from Appendix B based on_18_ years to target date and a projected average return on investment of_6% 10. Series of Annual Investments Required over Time line 8-line 9 30.906 # 9.754 Note 1: The "targeted financial goal is the amount of money you want to accumulate by some target date in the future. Note 2: If you're starting from scratch-that is, there is no initial investment-enter zero on line 5, skip lines 6 and 7, and then use the total targeted financial goal (from line 1) as the amount to be funded from a savings plan; now proceed with the rest of the worksheet