RETIREMENT PLANNING

Bob Davidson is a $46-$year$-$old tenured professor of marketing at a small New England business school. He has a daughter, Sue, age $6,$ and a wife, Margaret, age $40.$ Margaret is a potter, a vocation from which she earns no appreciable income. Before she was married and for the first few years of her marriage to Bob $($she was married once previously$),$ she worked at a variety of jobs, mostly involving software programming and customer support.

Bob$$s grandfather died at age $42$; Bob$$s father died in $1980$ at the age of $58.$ Both died from cancer, although unrelated instances of that disease. Bob$$s health has been excellent; he is an active runner and skier. There are no inherited diseases in the family with the exception of glaucoma. Bob$$s most recent serum cholesterol count was $190.$

Bob$$s salary from the school where he works consists of a nine$-$month salary $($currently $$95,000),$ on which the school pays an additional $10$ percent into a retirement fund. He also regularly receives support for his research, which consists of an additional two$-$ninths of his regular salary, although the college does not pay retirement benefits on that portion of his income. $($Research support is additional income; it is not intended to cover the costs of research.$)$ Over the $12$ years he has been at the college his salary has increased by $4$ to $15$ percent per year, although faculty salaries are subject to severe compression, so he does not expect to receive such generous increases into the future. In addition to his salary, Bob typically earns $$10,000$ to $20,000$ per year from consulting, executive education, and other activities.

In addition to the $10$ percent regular contribution the school makes to Bob$$s retirement savings, Bob also contributes a substantial amount. He is currently setting aside $$7,500$ per year $($before taxes$).$ The maximum tax$-$deferred amount he can contribute is currently $$10,000$; this limit rises with inflation. If he were to increase his savings toward retirement above the limit$,$ he would have to invest after$-$tax dollars. All of Bob$$s retirement savings are invested with TIAA$$CREF $($Teachers Insurance and Annuity Association$-$College Retirement Equities Fund; home page: www$.$tiaa$-$cref.org$),$ which provides various retirement, investment, and insurance services to university professors and researchers. Bob has contributed to Social Security for many years as required by law, but in light of the problems with the Social Security trust fund he is uncertain as to the level of benefits that he will actually receive upon retirement. $($The Social Security Administration$$s website is www$.$ssa.gov.$)$

Bob$$s TIAA$-$CREF holdings currently amount to $$137,000.$ These are invested in the TIAA long$-$term bond fund $(20$ percent$)$ and the Global Equity Fund $(80$ percent$).$ The Global Equity Fund is invested roughly $40$ percent in U$.$S$.$ equities and $60$ percent in non$-$U$.$S$.$ equities. New contributions are also allocated in these same proportions.

In addition to his retirement assets, Bob$$s net worth consists of his home $($purchase price $$140,000$ in $1987$; Bob$$s current equity is $$40,000)$; $$50,000$ in a rainy$-$day fund $($invested in a short$-$term money market mutual fund with Fidelity Investments$)$; and $$24,000$ in a Fidelity Growth and Income Fund for his daughter$$s college tuition. He has a term life insurance policy with a value of $$580,000$; this policy has no asset value but pays its face value $($plus inflation$)$ as long as Bob continues to pay the premiums. He has no outstanding debts in addition to his mortgage, other than monthly credit$-$card charges.

Should Bob die while insured, the proceeds on his life insurance are tax free to his wife. Similarly, if he dies before retirement, his retirement assets go to his wife tax free. Either one of them can convert retirement assets into annuities without any immediate taxation; the monthly income from the annuities is then taxed as ordinary income.

Bob$$s mother is $72$ and in good health. She is retired and living in a co$-$op apartment in Manhattan. Her net worth is on the order of $$300,000.$ His mother$-$in$-$law, who is $70,$ lives with her second husband. Her husband is $87$ and has sufficient assets to pay for nursing home care, if needed, for his likely remaining lifetime. Upon her husband$$s death, Bob$$s mother$-$in$-$law will receive ownership of their house in Newton, Massachusetts, as well as one$-$third of his estate $($the remaining two$-$thirds will go to his two children$).$ Her net worth at that point is expected to be in the $$300,000400,000$ range.

Bob$$s goal is to work until he is $60$ or $65.$ He would like to save enough to pay for his daughter$$s college expenses, but not for her expenses beyond that point. He and his wife would like to travel, and do so now as much as his job and their family responsibilities permit. Upon retirement he would like to be able to travel extensively, although he would be able to live quite modestly otherwise. He does not foresee moving from the small town where he now lives