Purpose: The case provides the student to a very important issue in the age of baby boomers. Although retirement is not an issue directly affecting students, it is one in which they are likely to be called on for advice by parents and relatives. For those students who become financial planners, the case will have particular importance. Relation to Text: The case should follow Chapter 9. Complexity: The case is relatively straightforward and should require 3045 minutes. Sandra Gilbert, Retiree Sandra Gilbert, would reach the age of 65 2. Sandra's life expectancy is 20 more next year and was preparing for retirement. years, and she could receive an She had been working for Wolfson annuity of $35,000 a year for the next Manufacturing Company as an accountant 20 years. Because her annual income and quality control engineer for the last 25 would be relatively small, a tax rate years and accumulated $400,000 in her of 15 percent would apply. retirement account. Her husband, Warren, 3. Because females often outlived had passed away two years ago at the age of males, a CFP (Certified Financial 70 and they had no offspring. Planner) suggested 90 years would Al Wistert, from the Human Relations be a more realistic life expectancy. Bepartment, came to visit with Sandra in This would mean she could expect to anticipation of her retirement. He explained live 25 more years. Under that to her that there were anumber of options she scenario, she could expect to receive Sandra Gilbert, would reach the age of 65 2. Sandra's life expectancy is 20 more next year and was preparing for retirement. years, and she could receive an She had been working for Wolfson annuity of $35,000 a year for the next Manufacturing Company as an accountant 20 years. Because her annual income and quality control engineer for the last 25 would be relatively small, a tax rate years and accumulated $400,000 in her of 15 percent would apply. retirement account. Her husband, Warren, 3. Because females often outlived had passed away two years ago at the age of males, a CFP (Certified Financial 70 and they had no offspring. Planner) suggested 90 years would Al Wistert, from the Human Relations be a more realistic life expectancy. Department, came to visit with Sandra in This would mean she could expect to anticipation of her retirement. He explained live 25 more years. Under that to her that there were a pumber of options she scenario, she could expect to receive could take. $31,000 a year and pay taxes at the rate of 15 percent. Four Options 4. A fourth and final choice would be to take half the $400,000 initially and 1. The first option was to take the entire the balance annually over the next 10 $400,000 when she retired next year. years in equal payments. The tax rate She could then take the funds and on the initial payment would be 35 invest them on her own. She would percent, and 15 percent on the be in a tax bracket of 35 percent and subsequent payments. would have to pay this rate on $400,000 before she could invest her There could be many other options for funds. Thirty-five percent is used for drawing down the $400,000 but Sandra ease of computation. preferred to consider these options for now. 1. Calculate the aftertax proceeds from option 1. 2. Assuming a discount rate of 8 percent, calculate the net present value of the aftertax benefits of the 2did option. 3. Once again assuming a discount rate of 8 percent, calculate the net present value of the aftertax benefits of the 3rd option. 4. What is the net present value of the fourth option based on the specified tax rates and an 8 percent discount rate? 5. Which of the four options provides the highest net present value? 6. In comparing option 2 and 3 , if a discount rate of four percent instead of eight percent were used, would your answer change? Explain the reasoning behind your conclusion. 2 Option 2: Annual fund Tax@15\% Taxes After tax income Discount rate: Net present value: use calculator 3 Option 3: Annual fund Tax@15\% Taxes After tax income Discount rate: Net present value: use calculator 4 Option 4: Initial payout Tax@35\% Taxes Net retigement fund plus Atter tax income Discount rate: Net present value: use calculator 4 Option 4: Initial payout Tax@35\% Taxes Net retirement fund plus Annual fund Tax@15\% Taxes After tax income Net present value: use calculator Total: 5 Option Highest NPV 6 If discount rate changes: Option 2: 6 If discount rate changes: Option 2: Annual fund Tax@15\% Taxes After tax income Discount rate: Net present value: use calculator Option 3: Annual fund Tax@ 15\% Taxes After tax income Discount rate: Net present value: use calculator The best option after changes of discount rate: Reaso