Lucas and Sara Investment and Retirement Case Study

Lucas and Sara are about to celebrate their one-year anniversary. They are both 22 years old. Sara graduated and has her first salaried job with benefits. Lucas has only two semesters left of school and will focus on his studies until he graduates. As part of the transition into full time work and more stable income, Lucas and Sara have decided to get serious about long term savings. They specifically want to focus on retirement savings and plan to retire at age 67. For retirement planning purposes, they assume they will live another 20 years after retiring.

Saras new job pays a yearly Gross Income of $52,000 (not including benefits). Use the top portion of the Excel Retirement Income Projection Worksheet to determine how much Sara will need to monthly contribute to her retirement needs. For planning purposes, use a 2.5% inflation rate. Keep in mind this is still an early estimate, but still a reasonable starting point.

After calculating their desired annual retirement income, Lucas and Sara consider the following general sources of retirement income:

• Social Security: This is a fixed percentage of income based on the case study.
• Company-sponsored benefits:
  • Pensions vary by company, but Lucas and Sara are hoping to find work that provide this benefit. They recognize that if this does not happen soon, they may need to find other ways of saving that money for themselves.
  • Since Saras current company provides a 401k, she and Lucas would like to begin investing in that right now (It provides a 7% annual rate of return)
• Personal Investment Plan: Lucas and Sara realize that they will need to begin saving money in other ways as soon as possible. For now, they decide to focus on other investments. They have found one with a historic rate of return of 8% annually, in a reputable mutual fund. In the future they will look to other types of accounts and investments as well.

Use the middle portion of the Retirement Income Projection Worksheet to explore different percentages of retirement income that might come from these different sources. Note how changing the percentage in column C affects the future annual income will need to come from each account. After considering a similar spreadsheet, Lucas and Sara decide to plan for:

• 30% of their future annual income from either Social Security or a company pension, which is fixed and is based on current retirees.
• 30% of their future annual income from Saras 401k
• 40% of their future annual income from other personal investments

Using these percentages and the worksheet, answer the following questions:

1. What is the total amount they will need in their 401k to retire based on the 4% rule?
2. How much will they need to save each month to accomplish this?
3. What is the total amount they will need in other personal investments, to retire?
4. How much will they need to save each month to accomplish this?

Lucas and Sara identify 5% of their current monthly budget that they can dedicate to beginning their 401k and personal investments. They will use this as a starting place and look for more ways to increase this soon. Sara has spoken with her human resources department and has chosen a 401k option that has historically retuned 7% annually. Her company will match her contributions dollar for dollar up to 3%. This means that her employer will contribute a matching percentage of whatever percentage she decides to contribute to this retirement account, but the max they will contribute is 3% of her salary.

Use the bottom portion of the worksheet to answer the following questions about how they will invest this 5%:

5. Option 1: Sara contributes 1% of her gross income to her 401k and 4% to their other investments. Will this be enough to generate the savings Sara is planning for retirement? Do you think she needs to save more (or do they have more than they need?) in each account? How much, for each account?

6. Option 2: Sara contributes 4% of her gross income to her 401k and 1% to their other investments. Will this be enough to generate the savings she is planning for retirement. Do they need to save more (or do they have more than they need?) in each account? How much, for each account?

7. Option 3: Identify a percentage of Saras gross income that you think would best help Lucas and Sara reach her retirement goal. What percentage do you recommend they contribute to Saras 401k? What percentage for their other investments? Is the 5% total contribution enough or did you have to choose a higher percentage?

Now, after figuring out how Saras 401K and Lucas and Saras other investments will help their retirement hopes, answer the questions in the Lucas and Sara Investment and Retirement Case Study assignment.