Question 1

Like many married couples, Galvin and Adeline Goh are trying their best to save for two important objectives: (1) an education fund to put their 2 children through college and (2) a retirement nest egg for themselves. They want to set aside $30,000 per child by the time each one starts college. Their children, Lilou and Milou, are currently aged 10 and 12 years old respectively. Galvin and Adeline have 6 years to save up for Milou and 8 years to save up for Lilou. As far as their retirement plans are concerned, Galvin and Adeline both hope to retire in 20 years when they both reach age 65. Galvin and Adeline are both working and they currently earn a combined income of about $100,000 per year. When they retire in 20 years, they hope to have a retirement income of about $60,000 per year and estimate a period of 15 years in retirement.

Five years ago, Galvin and Adeline started a college fund by investing $5,000 a year in bank certificates of deposits, which earns an interest of 6% per annum. The Gohs have also recently received an inheritance of $80,000 and have invested it in several mutual funds. They also have a total of $75,000 in their CPF accounts currently. Galvin and Adeline feel that they will easily be able to continue putting away $5,000 for the next 20 years. In fact, Adeline thinks that they will be able to put away even more, particularly after the children are out of school. The Gohs are fairly conservative investors and feel they can probably earn about 6% on their money before and during their retirement.

(a) Determine the current value of the college fund which the Gohs have set up 5 years ago.

(5 marks)

(b) Determine whether the Gohs have enough money right now to meet their children's educational needs. Will the funds which they have accumulated so far be enough to put their children through school? Remember that they want to set aside $30,000 for each child by the time each one starts college.

(15 marks)

(c) Regarding their retirement nest egg, assume that no additions are made to either the $80,000 which they have right now in mutual funds and to the $75,000 which they have in their CPF accounts. Determine how much these investments would be worth in 20 years, given that they can earn an average return of 6% per annum from investing in mutual funds and 4% per annum from their savings in the CPF accounts.

(10 marks)

(d) If the Gohs can invest $5,000 a year for the next 20 years and apply all of that to their retirement nest egg, determine how much they would be able to accumulate given a 6% rate of return.

(5 marks)

(e) Determine the lump sum which the Gohs would require at the start of their retirement. Calculate the retirement funding shortfall or surplus for the Gohs. Comment on how you think the Gohs are doing with regards to meeting their twin investment objectives and give advice as to how they can achieve their objectives.

(15 marks)