For your course project, you will complete the retirement planning case by making a spreadsheet model in Excel and using the model to answer the case questions. You will also apply the model to your personal situation . The project will be completed over five weeks and is worth 43% of your grade. A summary of the assignments and points follows:

 

Week Four: Project Action Plan                                                      50 points

Week Five: Make Influence Chart                                                50 points

Week Six: Make Model in Excel                                                    75 points

Week Seven: Answer Case Questions                                          75 points

Week Eight: Course Project Paper                                               125 points

 

The outline of the paper follows:

Section 1: Introduction & Describe Process to Create the Model 

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Section 2: Answer the case questions

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Section 3: Answer the case questions for yourself

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• Describe the process you used to analyze your personal situation.
• How many scenarios did you run; how long did it take you to feel comfortable with the numbers?
• Is the amount you are currently accumulating at your current savings rate adequate?
• How much should you be setting aside each year?
• How much will you have to live on when you retire?
• How long after retirement will you be able to live comfortably (like you are living now)?
• What risks do you face and how should your retirement planning take these risks into account?

 

 

Section 4: Reflection

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• Thinking back to Week One and the experience with spreadsheet discussion, do you feel more confident today in your ability to analyze data and build financial models using MS Excel? Why?
• After your experience in this class, do you see MS Excel as an essential workplace skill? Why?
• What surprises did you experience while using the Retirement Planning Model to analyze your personal situation?
• What changes do you plan to make to your retirement planning strategy as a result of this project? Please explain?
• Discuss three things you learned while completing this project. Be specific.

 

RETIREMENT PLANNING

Bob Davidson is a 46-year-old tenured professor of marketing at a small New England business school. He has a daughter, Sue, age 6, and a wife, Margaret, age 40. Margaret is a potter, a vocation from which she earns no appreciable income. Before she was married and for the first few years of her marriage to Bob (she was married once previously), she worked at a variety of jobs, mostly involving software programming and customer support.

Bob's grandfather died at age 42; Bob's father died in 1980 at the age of 58. Both died from cancer, although unrelated instances of that disease. Bob's health has been excellent; he is an active runner and skier. There are no inherited diseases in the family with the exception of glaucoma. Bob's most recent serum cholesterol count was 190.

Bob's salary from the school where he works consists of a nine-month salary (currently $95,000), on which the school pays an additional 10 percent into a retirement fund. He also regularly receives support for his research, which consists of an additional two-ninths of his regular salary, although the college does not pay retirement benefits on that portion of his income. (Research support is additional income; it is not intended to cover the costs of research.) Over the 12 years he has been at the college his salary has increased by 4 to 15 percent per year, although faculty salaries are subject to severe compression, so he does not expect to receive such generous increases into the future. In addition to his salary, Bob typically earns $10,000 to 20,000 per year from consulting, executive education, and other activities.

In addition to the 10 percent regular contribution the school makes to Bob's retirement savings, Bob also contributes a substantial amount. He is currently setting aside $7,500 per year (before taxes). The maximum tax-deferred amount he can contribute is currently $10,000; this limit rises with inflation. If he were to increase his savings toward retirement above the limit, he would have to invest after-tax dollars. All of Bob's retirement savings are invested with TIAA-CREF (Teachers Insurance and Annuity Association-College Retirement Equities Fund; home page: www.tiaa-cref.org), which provides various retirement, investment, and insurance services to university professors and researchers. Bob has contributed to Social Security for many years as required by law, but in light of the problems with the Social Security trust fund he is uncertain as to the level of benefits that he will actually receive upon retirement. (The Social Security Administration's website is www.ssa.gov.)

Bob's TIAA-CREF holdings currently amount to $137,000. These are invested in the TIAA long-term bond fund (20 percent) and the Global Equity Fund (80 percent). The Global Equity Fund is invested roughly 40 percent in U.S. equities and 60 percent in non-U.S. equities. New contributions are also allocated in these same proportions.

In addition to his retirement assets, Bob's net worth consists of his home (purchase price $140,000 in 1987; Bob's current equity is $40,000); $50,000 in a rainy-day fund (invested in a short-term money market mutual fund with Fidelity Investments); and $24,000 in a Fidelity Growth and Income Fund for his daughter's college tuition. He has a term life insurance policy with a value of $580,000; this policy has no asset value but pays its face value (plus inflation) as long as Bob continues to pay the premiums. He has no outstanding debts in addition to his mortgage, other than monthly credit-card charges.

Should Bob die while insured, the proceeds on his life insurance are tax free to his wife. Similarly, if he dies before retirement, his retirement assets go to his wife tax free. Either one of them can convert retirement assets into annuities without any immediate taxation; the monthly income from the annuities is then taxed as ordinary income.

Bob's mother is 72 and in good health. She is retired and living in a co-op apartment in Manhattan. Her net worth is on the order of $300,000. His mother-in-law, who is 70, lives with her second husband. Her husband is 87 and has sufficient assets to pay for nursing home care, if needed, for his likely remaining lifetime. Upon her husband's death, Bob's mother-in-law will receive ownership of their house in Newton, Massachusetts, as well as one-third of his estate (the remaining two-thirds will go to his two children). Her net worth at that point is expected to be in the $300,000−400,000 range.

Bob's goal is to work until he is 60 or 65. He would like to save enough to pay for his daughter's college expenses, but not for her expenses beyond that point. He and his wife would like to travel, and do so now as much as his job and their family responsibilities permit. Upon retirement he would like to be able to travel extensively, although he would be able to live quite modestly otherwise. He does not foresee moving from the small town where he now lives.

Bob has a number of questions about how he should plan for his retirement. Will the amount he is accumulating at his current rate of savings be adequate? How much should he be setting aside each year? How much will he have to live on when he retires? How long after retirement will he be able to live comfortably? What are the risks he faces, and how should his retirement planning take these risks into account?