1.(45 points) Let's complete little real-world retirement planning for you young whipper-snappers.Assume that you have graduated and have been hired by a good company.Your starting salary will be $50,000.They sent you a lot of paperwork related to your employee benefits, but you're having trouble making sense of that stuff (not uncommon).

The paperwork says that your retirement plan will consist of a 401(k) plan.You are eligible to participate immediately but there is a 5-year graduated vesting schedule.The company will make a contribution equal to 2% of your salary every pay period.You are not required to make any contributions to your 401(k); however, the company will match your contributions "$0.50 on the $1.00" up to a maximum of 5% of your salary.

The 401(k) offers a choice of the following 12 mutual funds:

2055 Target AllocationRussell 3000 Index Fund

2060 Target AllocationRussell 1000 Index Fund

2065 Target Allocation Russell 2000 Index Fund

Capital Preservation FundEAFE International Fund

US Short-term Government BondUS Real Estate Investment Trust (REIT)

US Intermediate & Long-term BondPrecious Metals Fund (gold, silver, etc.)

If you do not tell the company how you want to invest your retirement funds they will use the 2055 Target Allocation fund as the default investment.

a.(5 points) Your intended retirement date is in the year 2058.You have no interest in managing your investments, so you want to use one of the three Target Allocation funds.Assuming that you want to try to earn the highest return over your working career, which of the three Target Allocation funds will you choose?

b.(10 points)You just finished a Personal Finance course and it got you interested in managing your investments, at least a little bit.You do not want to use the Target Allocation Funds.You like the idea of Doc White's "2 Mutual Fund" asset allocation process - using only 2 mutual funds for your retirement investments.Which two out of the 9 remaining mutual funds would you use to allocate your retirement investments?What percent of your investments would you put into each of these two funds?(Assume that you are currently 20 years old)

Fund #1Name:%

Fund #1Name:%

c.(15 points) Actually, you changed your mind.Doc White's "2 Mutual Fund" process only invests in US companies.You want to gain some international exposure so that your retirement portfolio is more diversified.Which 3 mutual funds will you use, and what % of your investment will you put in those 3 (should add to 100%) ?Leave the % line blank if you are not going to use that fund.

% Russell 3000 Index Fund% US Short-term Government Bond

% Russell 2000 Index Fund % Capital Preservation Fund

% Russell 1000 Index Fund% US Intermediate & Long-term Bond

% EAFE International Fund

% US Real Estate Investment Trust

% Precious Metals Fund

d.(15 points) Mr. Gibbs said that you really don't want to use more than 7 mutual funds in your retirement plan.Doc White agrees with him.Which 7 mutual funds would you use to get a well-diversified retirement portfolio?What percent of your retirement contributions would you put in each of those 7 funds (should add to 100%)?Leave the % line blank if you are not going to use that fund.

% Russell 3000 Index Fund% US Short-term Government Bond

% Russell 2000 Index Fund % Capital Preservation Fund

% Russell 1000 Index Fund% US Intermediate & Long-term Bond

% EAFE International Fund

% US Real Estate Investment Trust

% Precious Metals Fund

2.(25 points) Use Doc White's Retirement Planning Worksheet (spreadsheet, Module 9 on Canvas) to determine the minimum amount of money that will need to invested each month to reach your retirement goals - this includes your contributions and your employer's contributions.Use these assumptions:

Years until retirement45 years

Years in retirement30 years

Pre-retirement inflation rate3%

Pre-retirement nominal rate of return8%

Retirement inflation rate5%

Retirement nominal rate of return7%

Desired Amount Remaining at Death$0

Annual living expenses in retirement (in 2017 dollars)$60,000

Annual Social Security retirement benefit$0

Other sources of retirement income$0

Current savings $5,000

a.(3 points) How much money will you need in your retirement account on the day you retire?

Amount Needed at Retirement to Generate Additional Income = $

b.(2 points) How much will need to be invested into your retirement account each year to reach your goal?This includes all forms of contributions - yours, your employer's.

Additional Savings Needed to Reach Your Retirement Goal = $

c.Yikes! That's a lot of money!Calm down!!Let's see where this money can come from.

i. (2 points) How much will your company invest each year, regardless of whether you invest anything into your 401(k)?

Employer's Mandatory Contribution/Year = $

ii.(3 points) What is the maximum matching contribution that your employer will make each year? Remember, the company will match $0.50 for every $1 you invest - up to a maximum of 5% of your salary.

Maximum Employer Matching Contribution/Year = $

iii.(3 points) What is the minimum amount that you need to invest each year to get the maximum employer matching contributions?Remember, the company will match $0.50 for every $1 you invest - up to a maximum of 5% of your salary.

Minimum you need to invest to get maximum employer match:$

iv.(2 points) What is the total of your contributions and your employer's contributions each year?

Total Contributions/Year = $

v.(3 points) From your result in part iv, will you have to contribute more money to your 401(k) or to a Roth IRA to meet your retirement goals?

No.I'll have enough money to reach my retirement goals.

Yes.I will have to add $ more money to my 401(k) or Roth IRA.

vi.(2 points) Let's look at the impact of taking more risk with your investments (say, putting a higher percentage of your investment into the EAFE International fund...)?What happens to the amount you will need to invest to reach your retirement goals if your 401(k) earns a 9% pre-retirement nominal rate of return?

Additional Savings to Reach Your Goal = $

vii. (2 points) Let's look at the impact of taking less risk with your investments (say, putting a higher percentage of your investment into the INT/LT Government Bond fund...)?What happens to the amount you will need to invest to reach your retirement goals if your 401(k) earns a 6% pre-retirement nominal rate of return?

Additional Savings to Reach Your Goal = $

3.Your new job will be in one of 3 cities across the US.Let's look at the cost of living in these areas by using the NerdWallet.com Cost of Living Calculator (link is on posted below and on Canvas, Assignment 3).In particular, let's look at the cost of living in these cities compared to the Blacksburg, VA, area.

https://www.nerdwallet.com/cost-of-living-calculator?trk=nw_gn2_4.0

The 3 cities are:

San Francisco, CAWashington, DCCharlotte, NC

a.(9 points)For each of the possible cities where you might be living list the comparable salary and cost of living for the major items listed below:

Comparables:

Blacksburg, VA

San Francisco, CA

Washington, DC

Charlotte, NC

Salary

$50,000

Average House Value

$221,831

Average Apartment Rent

$883

McDonald's Qtr-Pounder with cheese

$4.09

b.Assume that you will be moving to scenic Charlotte, NC, earning a salary of $54,000.Let's use some of old Doc White's rules of thumb to see what your living conditions will be:

i.(3 points) How much money does Doc White recommend that you try to save & invest each month?

Monthly Savings & Investments ($):

ii.(3 points) What is the maximum amount of money that Doc White suggests you devote to consumer loan payments (car loans, student loans, credit card debt)?

Maximum Consumer Loan Payments/Month ($):

iii.(3 points) What is the maximum amount that you can afford to pay per month for a home mortgage using Doc White's housing debt rule?

Maximum Mortgage Payments/Month ($):

iv.(2 points) Let's assume that 25% of your gross salary will go towards paying your income taxes and payroll taxes.How much will you be paying in taxes each month?

Monthly Tax Payments ($):

v.(2 points) Let's assume that your "other expenses" (food, utilities, travel, entertainment, etc.) will be $800/month.How much money will you have left over each month after paying your loans, paying your taxes, saving & investing?

Monthly "Discretionary Income" ($):

vi.(2 points) Can you afford a house in Charlotte on your salary?Use the average house value in Charlotte (from your table).Multiply that value by 20% to estimate the amount of down payment you will be making to purchase this house.

Estimated Down Payment: $

(2 points) Subtract the down payment from the value to determine the amount of mortgage you will need to purchase the house.

Estimated Loan Amount: $

(2 points) Assuming that the mortgage will be for 360 months (30 years) at 5% APR, calculate the monthly mortgage payment you will be making to purchase this house.

Monthly Mortgage Payment: $

(2 points) What percent of your gross salary is this monthly mortgage payment?

Mortgage Payment/Gross Salary: $