Simon and Sandra Soh are no different from many young families who are concerned with their finances. In their fact-finding form, they have emphasised the two most important financial goals to you: (1) saving a college fund for their 2 children and (2) having enough retirement fund for themselves.

They wish to save $30,000 per child by the time each one starts college. Their children, Sara and Sophie, are currently aged 10 and 12 years old, respectively. Simon and Sandra have 10 years to save up for Sara and 8 years to save for Sophie.

Retirement planning is also on the top of their mind, and both hope to retire when they reach age 65. Both are aged 40, and earn a combined income of $120,000 per year. They hope to have a retirement income of about $60,000 per year and estimate 20 years in retirement.

Recently, they have received an inheritance of $120,000 and have invested the money in several unit trusts. They also have a total of $85,000 in their CPF accounts currently. The Sohs are relatively conservative investors and believe they can achieve a return of about 6% p.a. during their retirement.

With little or no idea of how they should plan for their financial goals, they have approached you, a financial planner, for advice on their financial planning matters.

(a) Compute the lump sum needed to achieve $30,000 for Sara and Sophie when they are 20 years old. Calculate the amount required to achieve the $30,000 for Sara and Sophie if Simon and Sandra prefer to invest on a yearly basis.

(b) In their retirement planning they expressed that they do not have excess money to plan for retirement. Right now the only investment is the $120,000 in unit trust and the balance of $85,000 in their CPF accounts. Appraise what the value of these investments would be in 25 years, if they can earn an average return of 7% per annum from the unit trust investment and 4% per annum from their balance in the CPF accounts.

(c) After some discussion the Sohs believe they can set aside $5,000 a year for the next 25 years for their retirement plans, compute how much they would be able to accumulate given a 7% rate of return.

(d) Calculate the lump sum that the Sohs would require at the beginning of their retirement. If the Sohs are willing to use the investments calculated in 1(b) and 1(c), compute the Sohs retirement shortfall or surplus (assume inflation at 3% p. a.).