Mario is 25 years old. He and his wife Anna have two children, ages 1 and 3. wants to retire in 40 years and refurbish old cars. He would like a nice retirement home with some land on a peaceful lake in the mountains of Pennsylvania. Mario believes that to purchase a home and lot in 40 years would cost $200,000 in todays prices. In forty years Mario also believes he and his wife can live comfortably on $35,000 a year in today's dollar terms. Realizing that retirement is only 40 years away, and that he still had two children to raise and put through college, Mario thought he had better start saving for his retirement dreams. Also, Lisa is only 15 years away from college, and before Lisa finishes, Shane will be ready for school in 17 years. Currently Mario has $5,000 in an emergency money market account earning 4.0% interest compounded daily. His desire is to never have to use those emergency funds and that they will become a part of his estate. He also owns his own home that has a market value of $100,000 and a mortgage of $90,000. The 8.0% mortgage has 28 years remaining and his monthly payments are $672 for principal and interest alone.

Mario annual salary is $40,000. His employer puts an additional $2,000 into a 401(k) retirement plan. This retirement amount currently equals $4,000 and it is invested in a stock mutual fund, which has been earning an annual rate of return of 10.0%. With the current level of the federal debt, Mario is not counting on receiving any funds from social security at his retirement. With all of the concern about college tuition increasing over the years, Mario believes that the children will have to go to the local junior college for their first two years and then a state school for their last two years. The cost to attend the local junior college is $3,000 per year today, and the cost to attend a state school is $10,000 per year today. Inflation will have a great impact on Marios future retirement and college plans for his children. Based on what he has read and heard on the news, Mario believes that inflation will average 4.0% per year for the next 40 years; however, the cost of a college education will increase by 7.0% per year for the junior college and state school. Also, with the desirability of vacation homes, the house and property in Pennsylvania will probably increase at a rate of 6.0% per year, while his current home will increase in value at a rate of 5.0% per year. Mario hopes that his annual salary will increase by at least 3.0% per year.

Note: For each of the computations completed below, answers can be stated to the nearest dollar.

5. If the emergency money market funds are not used, what will be the value of the funds at retirement?

6. Assuming that Marios employer continues to put $2,000 every year into a 401(k) retirement and the account remains in the stock mutual fund, how much will be in the retirement account in 40 years?

7. Assuming that Mario has no money set aside for his childrens college at this time, approximately how much will he have to save per month for Shanes education, for Lisas education, if he earns 5.0% on the invested funds. (Assume that he wants to have $85,000 available for Lisa and $95,000 available for Shane at the start of each childs college education to pay for the entire four years.)

8. Assuming that Mario wants enough income for 25 years of retirement and the rate of inflation will remain at 4.0% per year, how much will Mario and Anita need to live on for the 25 years? (Hint: Use $170,000 for your payment variable.)

9. How much will Mario need to save per month to pay for Anita and his retirement income for 25 years assuming that Mario can earn 8.0% per year on the invested funds. (Assume he will need to make the monthly savings every month for the next 65 years.) (Hint: Use $7,000,000 as your future value variable.)

10. Mario hopes that the money from his retirement funds plus what he makes on the sale of his current home will be enough to allow him to buy the retirement home. Can this goal be realized?

11. Based on the level of savings that Mario needs to achieve over the next 20 years, discuss the feasibility of his achieving his objectives for his childrens education and his retirement.

12. Discuss ways in which Mario can increase the probability of achieving his desired education and retirement goals. What role does risk play in the investment process?