Goal 1: Youngs want to plan for early retirement (100% wage replacement ratio, excluding the trust income) at age 62, as they want to spend the autumn of their lives together traveling and visiting friends and family. Goal 2: They expect the children to be in school for 6 years each. Financial information: Alan plans to save $18,000 per year in a 401(k) plan starting this year and to have an employer match of $6,000. As neither of the Youngs currently have 40 quarters of Social Security earnings and because they are planning to retire at age 62, they do not want to include any Social Security retirement benefits in their planning. Assumptions: They expect to live to age 90. The current cost of education is $35,000 per year in today's dollars and the inflation rate is expected to be 5%. They expect the 529 Plan's investment rate to be 8.5%. Additional condition for this case analysis: IGNORE THE FACT THAT ANGEL'S FATHER MAY FUND THE 529 PLAN. 1. Retirement needs Step 1: Calculate Youngs' annual retirement needs in today's dollars Needs at Retirement (age 62) Current income Wage replacement ratio Needs in today's dollars FV 262 II Step 2: Calculate the present value of the Youngs' retirement needs now at age 36. Step 2-1 Step 2-2 N N FV PMT PMT PV 862 PV of the Youngs' retirement needs: 2. Education needs Step 1: Calculate the inflation-adjusted, six-year cost of each child's college education 11 11 11 11 11 PV 36 = . N = i = FV = PMT = PV= Step 2: Calculate the present value of the lump-sum cost of each child's six years of college. For the 4 old For the 2 year old FV N FV N = = PMT PMT PV PV Total PV of two children: 3. PV of all goals vs. all current resources Present value of education (1) Present value of retirement (2) Present value of all goals (1) +(2) $ Less: Current resources ($ Net present value of all goals and resources S Total net present value of all goals 4. Annual savings required to meet all goals Annual savings N i FV PV@36 PMT Annual savings required: 5. Compare annual savings required to current savings: Annual savings needed Annual savings needs Less: Current savings Additional savings Additional savings needed: Recommendations: Goal 1: Youngs want to plan for early retirement (100% wage replacement ratio, excluding the trust income) at age 62, as they want to spend the autumn of their lives together traveling and visiting friends and family. Goal 2: They expect the children to be in school for 6 years each. Financial information: Alan plans to save $18,000 per year in a 401(k) plan starting this year and to have an employer match of $6,000. As neither of the Youngs currently have 40 quarters of Social Security earnings and because they are planning to retire at age 62, they do not want to include any Social Security retirement benefits in their planning. Assumptions: They expect to live to age 90. The current cost of education is $35,000 per year in today's dollars and the inflation rate is expected to be 5%. They expect the 529 Plan's investment rate to be 8.5%. Additional condition for this case analysis: IGNORE THE FACT THAT ANGEL'S FATHER MAY FUND THE 529 PLAN. 1. Retirement needs Step 1: Calculate Youngs' annual retirement needs in today's dollars Needs at Retirement (age 62) Current income Wage replacement ratio Needs in today's dollars FV 262 II Step 2: Calculate the present value of the Youngs' retirement needs now at age 36. Step 2-1 Step 2-2 N N FV PMT PMT PV 862 PV of the Youngs' retirement needs: 2. Education needs Step 1: Calculate the inflation-adjusted, six-year cost of each child's college education 11 11 11 11 11 PV 36 = . N = i = FV = PMT = PV= Step 2: Calculate the present value of the lump-sum cost of each child's six years of college. For the 4 old For the 2 year old FV N FV N = = PMT PMT PV PV Total PV of two children: 3. PV of all goals vs. all current resources Present value of education (1) Present value of retirement (2) Present value of all goals (1) +(2) $ Less: Current resources ($ Net present value of all goals and resources S Total net present value of all goals 4. Annual savings required to meet all goals Annual savings N i FV PV@36 PMT Annual savings required: 5. Compare annual savings required to current savings: Annual savings needed Annual savings needs Less: Current savings Additional savings Additional savings needed: Recommendations
