parts 4-7
Part 6: Supplementing Prof. Business' Retirement Savings. Prof. Business is considering retirement in 5 years. She is in a self-managed defined contribution pension plan and through automatic payroll deduction and University matching both based on mandated percentages of her salary $1400/month is currently deposited into her pension plan. Due to the lack of recent raises at her public university, she doesn't plan on these monthly contributions increasing much if any over the next 5 years. Prof. Business currently has $900,000 in her pension plan account and is somewhat concerned if this along with her mandated future $1400 monthly deposits will adequately fund her retirement in 5 years. She is considering supplementing her pension plan by having automatic additional monthly deposits deducted into a 403c retirement plan which is like a 401k plan for employees of non-profit organizations like public universities. She is comfortable that this 403c plan since it has the same investment management companies and investment options as her current pension plan and it also has a Roth option where she won't get a tax break for her deposits but her retirement withdrawals will be tax free. Prof. Business has a monthly deposit amount in mind, but wants your help in trying to figure out if this amount will be adequate. Given her current pension plan portfolio investment mix, she estimates a nominal annual expected return of 7.2% which translates to a 0.6% monthly expected return. 1. Prof. Business is considering having $1000/ month deducted from her salary and deposited into the 403c for the next 5 years. This is addition to the $900.000 already in her pension plan today and the estimated $1400 monthly deposits into her current pension plan. What is the expected total value of Prof. Business' retirement accounts after making end of the month deposits of $2400 for 5 years on top of her current retirement savings of $900.000 at her expected monthly return? 2. Prof, Business estimates she will live for 20 years after her planned retirement in 5 years and wants a monthly retirement annuity with the withdrawals at the end of each month once she retires. What is her expected monthly retirement income using your answer from #1 and assuming she will earn a 0.5% ( 6.0% APR) expected monthly return after retirement? 3. Upon hearing the amount of this monthly retirement annuity. Prof. Business is happy with this figure because it's close to her current pre-tax income. However, she wonders if her expected monthly investment return is too optimistic and wants to change it to a 6% nominal annual rate, of 0.5% per month before and after retirement. Also, she wants a monthly income of $11,000 once she retires (for 20 years). How much extra above her estimated mandated $1400 monthly pension plan amount would Prof. Business need to deposit monthly into the 403c plan over the next 5 years to fund this retirement income goal? - Prof. Business decides to buy a 2022 Honda CR-V Touring edition. After paying a down payment and taxes, Prof. Business can finance the rest of the purchase price with a loan of $22,000 for 48 months at a special finance rate offered by Honda of 2.9% APR compounded monthly. - Prof. Business finds out that Honda has a second offer of $1000 cash back (which will be used as an additional down payment) in place of the special 2.9% finance rate offered. Prof. Business can get 4.29% APR financing online for 48 months with the $1000 cash back offer. Answer the following questions. 1. What is the effective annual fate for each loan? 2. What would be the monthly car loan payment under the Honda's 2.9% APR financing offer (assume a 48month loan term)? 3. What would be the monthly car loan payment under the $1000 cash back offer and the 4.29% APR pre-approved financing (assume a 48-month loan term)? 4. At what APR would Prof, Business be indifferent between the two offers? In other words, what APR (assuming a 48 month loan term) for the $1000 cash back offer would have the same monthly payment with the 2.9% APR financing offer? 5. Let's assume you go with the offer in question #3. Construct an amortization schedule for the loan for all 48 monthly payments (see section 5-18 of the textbook). What is your loan balance after 36 months? 6. The local Honda dealer tias found a special 3.19% APR loan rate for 48 months from Citibank that Prof. Business qualifies for if he elects the $1000 cash back option. Finance says that's great! What would be the monthly payment under this loan? 7. Prof. Business is more than happy with the 3.19% APR and $1000 cash back offer but wants a monthly payment of $425 (assume a 48-month loan term) and realizes he will have to put more money down. How much additional money will Prof. Finance have to put down in order to achieve his target monthly payment? Note: original loan amount with cash back was $21,000. Part 6: Supplementing Prof. Business' Retirement Savings. Prof. Business is considering retirement in 5 years. She is in a self-managed defined contribution pension plan and through automatic payroll deduction and University matching both based on mandated percentages of her salary $1400/month is currently deposited into her pension plan. Due to the lack of recent raises at her public university, she doesn't plan on these monthly contributions increasing much if any over the next 5 years. Prof. Business currently has $900,000 in her pension plan account and is somewhat concerned if this along with her mandated future $1400 monthly deposits will adequately fund her retirement in 5 years. She is considering supplementing her pension plan by having automatic additional monthly deposits deducted into a 403c retirement plan which is like a 401k plan for employees of non-profit organizations like public universities. She is comfortable that this 403c plan since it has the same investment management companies and investment options as her current pension plan and it also has a Roth option where she won't get a tax break for her deposits but her retirement withdrawals will be tax free. Prof. Business has a monthly deposit amount in mind, but wants your help in trying to figure out if this amount will be adequate. Given her current pension plan portfolio investment mix, she estimates a nominal annual expected return of 7.2% which translates to a 0.6% monthly expected return. 1. Prof. Business is considering having $1000/ month deducted from her salary and deposited into the 403c for the next 5 years. This is addition to the $900.000 already in her pension plan today and the estimated $1400 monthly deposits into her current pension plan. What is the expected total value of Prof. Business' retirement accounts after making end of the month deposits of $2400 for 5 years on top of her current retirement savings of $900.000 at her expected monthly return? 2. Prof, Business estimates she will live for 20 years after her planned retirement in 5 years and wants a monthly retirement annuity with the withdrawals at the end of each month once she retires. What is her expected monthly retirement income using your answer from #1 and assuming she will earn a 0.5% ( 6.0% APR) expected monthly return after retirement? 3. Upon hearing the amount of this monthly retirement annuity. Prof. Business is happy with this figure because it's close to her current pre-tax income. However, she wonders if her expected monthly investment return is too optimistic and wants to change it to a 6% nominal annual rate, of 0.5% per month before and after retirement. Also, she wants a monthly income of $11,000 once she retires (for 20 years). How much extra above her estimated mandated $1400 monthly pension plan amount would Prof. Business need to deposit monthly into the 403c plan over the next 5 years to fund this retirement income goal? - Prof. Business decides to buy a 2022 Honda CR-V Touring edition. After paying a down payment and taxes, Prof. Business can finance the rest of the purchase price with a loan of $22,000 for 48 months at a special finance rate offered by Honda of 2.9% APR compounded monthly. - Prof. Business finds out that Honda has a second offer of $1000 cash back (which will be used as an additional down payment) in place of the special 2.9% finance rate offered. Prof. Business can get 4.29% APR financing online for 48 months with the $1000 cash back offer. Answer the following questions. 1. What is the effective annual fate for each loan? 2. What would be the monthly car loan payment under the Honda's 2.9% APR financing offer (assume a 48month loan term)? 3. What would be the monthly car loan payment under the $1000 cash back offer and the 4.29% APR pre-approved financing (assume a 48-month loan term)? 4. At what APR would Prof, Business be indifferent between the two offers? In other words, what APR (assuming a 48 month loan term) for the $1000 cash back offer would have the same monthly payment with the 2.9% APR financing offer? 5. Let's assume you go with the offer in question #3. Construct an amortization schedule for the loan for all 48 monthly payments (see section 5-18 of the textbook). What is your loan balance after 36 months? 6. The local Honda dealer tias found a special 3.19% APR loan rate for 48 months from Citibank that Prof. Business qualifies for if he elects the $1000 cash back option. Finance says that's great! What would be the monthly payment under this loan? 7. Prof. Business is more than happy with the 3.19% APR and $1000 cash back offer but wants a monthly payment of $425 (assume a 48-month loan term) and realizes he will have to put more money down. How much additional money will Prof. Finance have to put down in order to achieve his target monthly payment? Note: original loan amount with cash back was $21,000
