Chad is a 49 year-old manager at an insurance company who earns $90,000 a year. He has a daughter about to graduate from college (Patti), and a 16-year old son who expects to get a juggling scholarship to attend Duke. Chad currently has $284,000 in his retirement account. He has earned an average return of 7.4% per year on his investments, and expects to continue doing so in the future until he retires 17 years from today. On the day Chad retires, he plans to shifts his portfolio to more conservative investments from which he expects to earn 4.2% per year. In retirement, Chad wants to be able to withdraw $6,500 each month (starting one month from the day he retires). Hes obviously not sure how many years hes going to live after he retires, so he wants to evaluate three possible different retirement plans.

Retirement Plan 1: Receiving payments for 20 years after retiring and having nothing left in the retirement account

Retirement Plan 2: Receiving payments for 30 years after retiring and having $200,000 left in the retirement account

Retirement Plan 3: Setting up a trust that will pay $6,500 to himself (and then his heirs) every month forever; the trust will have a 1% management fee, so effectively the actual annual rate of return will only be 3.2%.

For each of the retirement plans above, answer the questions below. Please include clear explanations of the calculations and/or calculator inputs used in your work.

1. How much money will Chad need in his account on the day he retires?
2. Chad can start making monthly contributions to his retirement account one month from today. How much should he contribute each month?
3. Suppose Chad lives 5 years longer or shorter than expected. How would each of these possibilities affect the amount he leaves to his heirs (possibly as debt)?
4. Suppose Chad can contribute $200 per month to his account from now until he retires. How much would his monthly withdrawals be?
5. If Chad can only contribute $200 a month and is absolutely determined to follow each plan with withdrawals of $6500 a month, what rate of return would he need to earn before retirement to achieve this goal? Are there any drawbacks to seeking a return this high?