Callie and Trinity Jackson are married and interested in planning for their retirement. Callie is 47 years old, while Trinity is three years younger. They would like to plan on retiring when Callie is age 65, which is when their mortgage on their home will be paid off. Their mortgage payment is $2,000 per month. Callie earns $75,000 and Trinity earns $105,000. They have current savings of $250,000 and would like to plan on a wage replacement ratio (WRR) of 80 percent, including Social Security. They currently save $15,000 each in their respective 401(k) plans. Neither of their plans offer an employer match.

They have been reading that 70 percent to 80 percent for wage replacement is optimal. They both reach full retirement age under Social Security at age 67. Callie and Trinitys Social Security retirement benefit at full retirement age is projected to be $2,500 and $3,000 per month, respectively. They want to plan on living until Trinity is age 95. Assume that inflation is two percent and they can earn seven percent on their investments.

1. Calculate their needs at age 65 and their annual savings requirement.

2. Comment on the wage replacement ratio assumption.

3. Recalculate their needs at age 65 based on adjusting the WRR (include assumptions for the new WRR).

4. After spending time discussing retirement scenarios and what they want in their future, the Jacksons ask if they could afford to buy a beach house if they worked until age 70. Assume that the beach house they really want is expected to cost $1.5 million when they retire.

5. The Jacksons like the idea of a $1.5 million beach house, however, they do not like the idea of working until Callie is 70 years old. You suggest that they consider retiring at age 65 with a 65 percent WRR and sell their current house at retirement and buy a beach house they can live in full time. They like the idea and ask how much they could afford for a beach house. Assume that their current house is worth $570,000 and is expected to increase at four percent per year. Ignore real estate closing costs for the calculation.