Edwin and Rachel Chua, both aged 39, are trying their best to accumulate a retirement nest egg for themselves. As far as their retirement plans are concerned, Edwin and Rachel both hope to retire in 21 years when they both reach age 60. Edwin and Rachel are both working and they currently earn a combined income of about S$150,000 per year. When they retire in 21 years, they hope to have a retirement income of about S$72,000 per year and estimate a period of 25 years in retirement.

4 years ago, Edwin and Rachel started a savings fund by setting aside $5,000 per year in bank certificates of deposits, which earns an inflation-adjusted interest rate of 2% per annum. The Chuas have also recently given up car ownership and sold their car for $40,000. They instead chose to invest the $40,000 proceeds from the sale of their car and the current value of their savings fund in several mutual funds. They also have a total of $85,000 in their OA and SA CPF accounts currently. Edwin and Rachel feel that they will easily be able to continue putting away $5,000 for the next 21 years till they retire. The Chuas are fairly conservative investors and feel they can probably earn an inflation-adjusted interest rate of about 4% on their money before and during their retirement.

(a) Determine the current value of the savings fund which the Chuas have set up 4 years ago.

(5 marks)

(b) Regarding their retirement nest egg, assume that no additions are made to their total investments now in mutual funds and to the $85,000 which they have in their CPF accounts. How much would these investments and CPF savings be worth in 21 years, given that they can earn on average an inflation-adjusted return of 4% per annum from investing in mutual funds and an inflation-adjusted return of 1.5% per annum from their savings in the CPF accounts?

(10 marks)

(c) If the Chuas can invest $5,000 a year for the next 21 years and apply all of that to their retirement nest egg, how much would they be able to accumulate given an inflation-adjusted 4% rate of return?

(5 marks)

(d) Determine the lump sum which the Chuas would require at the start of their retirement and calculate the retirement funding shortfall or surplus for the Chuas at the start of their retirement. Comment on how you think the Chuas are doing with regards to meeting their twin investment objectives and give advice as to how they can achieve their objectives. (You should advise on the additional savings required per year in the event of a retirement shortfall and ways to achieve this savings.)

(18 marks)

(e) To better prepare the Chuas for retirement, discuss the common pitfalls in retirement planning and strategies to overcome such pitfalls.

(12 marks)