Mr. and Mrs. Fok are both 40 years old and they approach you, a wealth manager, for advice on their retirement plan. These are the information provided by the couple :

Age : Both are 40; No children

Jobs : Mr. Fok (System Analyst); Mrs. Fok (Administration Manager)

Target retirement age : 60 years old (for both)

Life expectancy : 90 years old (for both)

Annual income : $540,000 (after tax) for Mr. Fok

$450,000 (after tax) for Mrs. Fok

Monthly expenses : $32,000 for Mr. Fok

: $23,000 for Mrs. Fok

Investment : Total investment in mutual funds (mix of bonds and stocks)

$1,000,000

(average annual return : 7%)

Cash on hand : Total $500,000

Apartment : No apartment (they may go back to Australia after retirement)

Monthly expenses : Expected to be 70% of their current level

after retirement

You agree with the couple that the investment return in the future will be set at 7% per year.

They prefer to keep their current mutual fund investment of $1,000,000 unchanged and allow it to grow steadily until their retirement.

You should assume end-of-period cashflows and show all steps clearly (round up your final answers to an integer) :

a. Estimate the amount of retirement fund they should have at the retirement age of 60 and explain the underlying concepts and assumptions in your calculation. (35%)

b. How much additional funds they have to save annually from now on until they retire ? (30%)

c. Explain all other factors they should consider and the limitations for this retirement plan. What are your recommendations to the couple to make this plan better. (35%)