Mark and Caren are 36 years old and plan on retiring at age 62 and expect to live until age 95. They currently earn $250,000 and expect to need $200,000 in retirement. They also expect that Social Security will provide $40,000 of benefits in todays dollars at age 62. They are saving $15,000 each in their 401(k) plans and just had a baby boy they named Albert Rufus or AR for short. They want to save for ARs college education, which they expect will cost $20,000 in todays dollars and they are willing to fund 4 years of college. They were told that college costs are increasing at 7% per year, while general inflation is 3%. They currently have $150,000 saved in each of their 401(k) plans and they are averaging a 9% rate of return and expect to continue to earn the same return over time.

Based on this information, what should they do? a. They are currently saving more than they need and can reduce their annual savings. b. They are doing just fine and should continue doing what they are doing.

c. They need to increase their annual savings by about $6,400 now that AR is born and they want to fund his college in addition to retirement.

d. They should increase their annual savings by about 7.5 percent and they should be fine.

Part 1: Retirement goal

Step 1: Determine Amount to be Funded (Needs)

Step 2: Inflate Funds to Retirement Age

Step 3: PV of Retirement Annuity

Step 4: Determine Needs in Today's Dollars

Part 2: Education goal

Step 1: Inflate Education Costs

Step 2: PV of Education Costs at Beginning of College

Step 3: Cost of Education in Today's Dollars

Part 3: Total goals

Step 1: Total Goals in Today's Dollars Converted to Annual Savings Amount

PV Retirement XX Education XX Total

Less Investment Assets

Net(PV) PMT=? To achieve the goal

Current savings XX Increase or decrease in savings? XX