John and Jane Smith are a middle class couple that spends $4,000.00 a month. If John and Jane want to retire at the age of 67 (and they are now 27):

1. How much money will they be spending per month assuming 3% inflation? How much is that per year? Assume that social security is still in existence and will meet four tenths (or 40%) of their spending needs.
2. Assume that John and Jane primarily save for retirement through their 401(k) plans at work. Please also assume that they can get an ending after-tax return of 3.75% on their retirement nest egg. You would get this rate if you assumed a 5% return on retirement assets that are invested in low-risk securities (5% x (1-.25 tax rate = .75) = 3.75%). Hint: If you divide their annual retirement spending by 3.75% you will get the amount of the nest egg they need for retirement.
3. Also assume that during their working years from age 27 to 67 they earn a 7% return on their 401(k) investments. How much money will they need to set aside in their 401(k) plans per month and per year in order to have an adequate retirement nest egg that compensates for the other 60% of their living expenses that social security does not cover.

PLEASE NOTE: Although their mortgage may go away and some other expenses may go away when they retire, it is safe to say that their out of pocket medical costs will greatly increase. Thus, please make the assumption that the monthly and annual amounts of money they will spend in retirement years are equivalent to the amounts they are spending during their working years.