Car, Home, Retirement: Whats My Plan?

Looking at her schedule, Jocelyn realized that she only had a few hours before her first meeting with her financial advisor. She had started her first job in September, earning $50,000 as an account executive at a high-tech firm, and one of the benefits of working at NewTech was a two hour meeting with a financial advisor. The advisor had sent along an email last week:

Exhibit 1: Email

Hi Jocelyn,

I am looking forward to our meeting next Thursday at 3pm. In order to prepare for our meeting, I would like for you to develop a list of short, medium and long-term savings goals. This will help us work together to figure out:

How much you will need to save

Where you should put your savings

In terms of point #2 above, I think that there are three options that you might consider for where to put your savings. I am listing them below as well as how much those investments have typically returned in a year. We want to make sure that you earn the highest returns for your money, so I will likely suggest all stocks but I wanted to make sure you saw that there were other options also.

Savings/Investment options:

Savings account (1% annual return)

Bonds (3-5% annual returns)

Stocks (7-9% annual returns)

Also, you should know that our firm has some of the best stock mutual funds around, and I look forward to sharing them with you soon.

Regards,

Tommy Stockman

Answer this:

List any concerns you have after reading this email:

Ok, short, medium and long term goals. If that is what he wants, then that is what he will get, Jocelyn thought aloud. I want a new car in 3 years, a house in 10 and I want to retire in 30. Jocelyn couldnt wait for the meeting, so she decided to put her spreadsheet skills to the test to see if she could figure out how much she needed to save in order to accomplish these three goals. She decided to tackle each of her goals from simplest to most challenging. First, she wanted to figure out how much she needed to save for the car down payment. Just to keep her mind focused on the goal ahead, she had this car advertisement set up as the screensaver on her laptop

DRIVE AWAY IN THIS BEAUTY TODAY!

BRAND NEW FOR ONLY $20K!

JUST $4000 DOWN PAYMENT! LOW 7% INTEREST RATE! 5 YEARS TO REPAY YOUR LOAN! YOU CANT AFFORD NOT TO!

:

Answer this:

2. In order to afford the down payment, how much will Jocelyn need to save for each of the next three years? Does this seem like a reasonable amount, given her salary?

Year 1: __________________

Year 2: _________________

Year 3: __________________

TOTAL

3. Where should Jocelyn stash her money for the down payment?

4. What will be her car payment for each of the following five years (years 4-8)? Use this auto loan calculator with the assumptions listed above and remember to convert monthly figures to annual ones (note that sales tax where she lives is 5%, and because this is her first car she wont benefit from trade in allowance).

Year 4: __________________

Year 5: __________________

Year 6: __________________

Year 7: __________________

Year 8: __________________

So far, so good. Now, it was on to her dream house, which Jocelyn thought would cost about $190,000 (the median price of homes in the United States at that time). Her goal was to buy the house in 10 years to give her enough time to save. She also been told that she would NOT need to pay the full cost of the house upfront, but that most home purchases required a down payment of 20% of the cost of the house. The remaining 80% she could borrow with a 30-year mortgage that currently had an interest rate of 5%. These rates would likely change when she was ready to borrow, but she needed an estimate.

Answer this:

5. What is the amount of the down payment that she will need to save for the home? How much will she need to borrow?

6. How much would she need to save for each of the first ten years to cover the down payment you calculated in #5? Does this seem reasonable given her salary? To be conservative, assume that she saves this money in a checking account not earning any interest.

7. Using this mortgage payment calculator, determine what her annual mortgage payment would be over the 30 year term assuming a 5% interest rate and using the amount she needs to borrow from Question #5. Be sure to convert monthly payments into annual costs.

8. Does this monthly payment seem reasonable for Jocelyn, using the standard rule of thumb that your mortgage payment shouldnt exceed 30% of your gross salary?

Now, it was on to retirement. Given her short-term (car down payment) and medium-term goals (home down payment), Jocelyn wasnt sure she would have any money left over to save for retirement. She remembered back to her high school personal finance class, when the teacher had urged students to start saving for retirement while they were young, but it was hard to be motivated by a goal that would be thirty years or more into the future.

Having seen her grandparents continue working into their 60s and 70s, Jocelyn was determined to retire after 30 years with $1,000,000 in her retirement account. She hoped to get married at some point and thought if she and her spouse each had $1,000,000 saved then they she should be OK. She found this nifty Millionaire Calculator to help her figure out how much she needed to save on a monthly basis to have $1 million saved in 30 years.

Answer this:

9. One of the key variables in the Millionaire Calculator is the Investment Rate. What do you think is a good assumption for Jocelyn to make? Based on this assumption, what type of investment do you think she will need to choose (using the three assets described in the email from her financial adviser)?

10. What is the relationship between the Investment Rate and the Investment Amount per Month? Use combinations of the words higher and lower in the following sentence:

The ____________ the investment rate, the ________ the amount that you will need to save to reach the $1,000,000 goal.

11. Using the assumption for Investment Rate in #9, how much will Jocelyn need to save on a monthly basis in order to have her $1,000,000 nest egg after 30 years? Assume that she starts saving at the age of 22.

12. Convert that monthly amount to an annual figure and compare to her annual salary. Does this seem like a reasonable amount for her to save?