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Posted on Jul 11, 2024

Bill (age 42) and Molly Hickok (age 39), residents of Anchorage, Alaska, recently told you that they have become increasingly worried about their retirement. Bill,

Bill (age 42) and Molly Hickok (age 39), residents of Anchorage, Alaska, recently told you that they have become increasingly worried about their retirement. Bill, a public school teacher, dreams of retiring at 62 so they can travel and visit family. Molly, a self-employed travel consultant, is unsure that their current retirement plan will achieve that goal. She is concerned that the cost of living in Alaska along with their lifestyle have them spending at a level they could not maintain. Although they have a nice income of more than

$100,000

per year, they got a late start planning for retirement, which is now just

years away. Bill has tried to plan for the future by contributing to his 403(b) plan, but he is only investing

percent of his income when he could be investing

percent. Use what they told you along with the information below to

help them prepare for a prosperous retirement.

Molly's income	$78,000
Bill's income	$42,500
Social Security income at retirement	$2,700/mo
Current annual expenditures	$72,000
Bill's Roth IRA	$19,700
Bill's 403(b) plan	$46,900
Marginal tax bracket	25%

Questions

1. Do Bill and Molly qualify for any other tax-advantaged saving vehicles? If so, which ones? To what extent?

2. Since Bill does not receive an employer match, should he invest the maximum amount in his Roth IRA annually or just invest more in his 403(b)? Defend your answer.

3. Assuming Bill and Molly can reduce expenses and invest more, how do their retirement savings limits differ before and after age 50?

4. Calculate the future value income need for their first year in retirement, assuming a

percent inflation rate and an

percent income replacement.5. Calculate the projected annual income at retirement that will be generated by their portfolio assuming an

percent nominal rate of return, a

20-year

retirement period, and no further contributions.

6. Given their projected Social Security and investment income, how much will Bill and Molly need to invest annually to make up their income shortfall? Into what account(s) would you suggest they make the investments?

7. Bill and Molly don't feel like they have very good self-control with savings other than of the limits they initially set for themselves 10 years ago. What recommendations do you have for them dealing with the annual pay increases at work?

8. Given Molly's concerns about their retirement preparation, what changes might they implement based on Principle 10: Just Do It! to secure their travel plans?

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1. Do Bill and Molly qualify for any other tax-advantaged saving vehicles? If so, which ones? To what extent?(Select from the drop-down menus.)

Yes, they both qualify for a Roth or traditional IRA, although the

Roth

traditional

offers the greatest benefits. They can contribute

$4,500

$5,500

$6,500

2014

into their IRA accounts and should seriously consider increasing their contributions as the limits continue to increase. Molly can also take advantage of a SEP-IRA or Keogh plan to defer some of her self-employment income. The SEP-IRA allows her to defer up to

percent of her income or

$52,000,

whichever is less, in

2014.

2. Since Bill does not receive a company match, should he invest the maximum amount in his Roth IRA annually or just invest more in his 403(b)? Defend your answer.(Select all the choices that apply.)

Although Bill should be funding both the Roth and his 403(b) to the greatest extent possible, fully funding the Roth typically offers the greatest advantage, assuming the same rate of return on the two accounts. Whereas both accounts grow tax-deferred, the Roth account will be withdrawn tax-free, whereas Bill will pay taxes on the contributions and the earnings in the 403(b) account.

B. However, the tax consequences in the current year should also be considered. For every

$1,000

Bill deposits in his 403(b), he saves

$250

in tax liability for the current year. Without the 403(b) contribution, the

$250

would have been paid to the federal government.

C. However, the tax consequences in the current year should also be considered. For every

$1,000

Bill deposits in his 403(b), he saves

$500

in tax liability for the current year. Without the 403(b) contribution, the

$500

would have been paid to the federal government.

D.Conversely, Bill must earn

$1,333

[$1,000/(10.25)

(ignoring Social Security and state taxes)] to have

$1,000

after taxes to fund the Roth. In summary, the simple answer is fund the tax-free account in the absence of a match for a tax-deferred account.

3. Assuming Bill and Molly can reduce expenses and invest more, how do their retirement savings limits differ before and after age 50?(Select from the drop-down menu.)

"Catch-up" contributions will apply to Bill and Molly when they are 50 years old or older, and will allow them to make additional

$1,000

$1,500

$2,000

$2,500

per person retirement contributions beyond the maximum annual limit. The provisions also apply to the 403(b) account, the Roth IRA, and the SEP-IRA or Keogh account for Molly's self-employment income, although the "catch-up" amounts vary by retirement plan.4. Calculate the future value income need for their first year in retirement, assuming a

percent inflation rate and income replacement of

percent.The future value "inflation-adjusted" income need is

$nothing.

(Round to the nearest dollar.)5. Calculate the projected annual income at retirement that will be generated by their portfolio assuming an

percent nominal rate of return, a

20-year

retirement period, and no further contributions.Assuming no further contribution into either retirement account, and a fixed withdrawal rate, their after-retirement annual income would be approximately

$nothing.

(Round to the nearest dollar.)

6. Given their projected Social Security and investment income, how much will Bill and Molly need to invest annually to make up their income shortfall?

The annual additional funding requirement to reach their income goal

$nothing.

(Round to the nearest dollar.)If the Hickoks want their retirement income to increase annually by

percent then they need to increase the annual additional funding requirement to reach their income goal of

$nothing.

(Round to the nearest dollar.)

Into what account(s) would you suggest they make the investments?

Investments for retirement should always be made in a tax-deferred account if at all possible. The Hickoks should consider increasing their investment into his 403(b) and IRA accounts, as well as starting tax-advantaged accounts for Molly's self-employment income.

Is the above statement true or false?

True

False

. (Select from the drop-down menu.)

Promise that they will get better at putting more money away for retirement when their salary increases.

Plan to work longer before retiring so that more contributions will be made to their retirement savings.

Enroll in the Save More Tomorrow (SmarT) program, in which they precommit to increasing their retirement saving rate when their salary increases.

8. Given Molly's concerns about their retirement preparation, what changes might they implement based on Principle 10: Just Do It! to secure their travel plans?

The following could be included:(Select all the choices that apply.)

Bill should increase his retirement plan contributions.

Molly should start an IRA.

Bill should open a self-employed retirement plan (e.g., SEP-IRA).

Molly should open a self-employed retirement plan (e.g., SEP-IRA).

Click to select your answer(s).