THE FAMILY Steve Smith, age 43, is a professor at Sample College. His wife, Sally, age 43, works in the IT Department at Sample College. Steve and Sally have been married for fifteen years and have three children from their marriage, Sara (age 13), Steve Jr. (age 10), and Sam (age 5). For retirement, they want to plan for 90% wage replacement at age 62 , without any consideration of Social Security. If they cannot achieve that they will consider a compromise between delaying retirement and lowering the wage replacement ratio as long as the wage replacement ratio is no less than 75% and the delayed retirement is no later than age 70 . They expect to live to age 90 . Steve Smith's Email to Bob Booth Dear Bob: Thanks for the list of questions. I am going to put my answers in red after each question to make it easier for both of us. - What is Steve's current income? - What is Sally's current income? - What is your current budget (in case something has changed)? I have attached our current budget. Fortunately, we have been able to implement many of your recommendations and decided to liquidate the Cornelius Inc. stock and the balance mutual fund to pay off our credit cards and vehicles. We have made other adjustments to our expenses and are in much better position than we were. - What is Steve's anticipated average annual salary increase? - What is Sally's anticipated average annual salary increase? - W 3% - What percentage of your current income do you anticipate needing in retirement? o 90% - What is the current balance in Steve's retirement account? What is the curen $50,000 - What is the current balance in Sally's retirement account? - What is Steve's retirement savings rate? o 6% - What is Sally's retirement savings rate? - 0% - Does Steve anticipate changing his savings rate? - Does Sally anticipate changing her savings rate? - - What is Steve's anticipated retirement age? - Age 62 - What is Sally's anticipated retirement age? - What is Sally's an 62 - How long does Steve expect to live in retirement? - 90 years old - What is Sally's anticipated retirement age? - Age 62 - How long does Steve expect to live in retirement? - 90 years old - How long does Sally expect to live in retirement? - 90 years old - Do you want to include Social Security in your retirement plan? - What rate of inflation would you like me to use? I would suggest three percent. - - 3\% is fine - What earnings rate would you like me to use? I would suggest eight percent. - 8% is fine In retirement, do you want to preserve the balance of your retirement savings, or is it okay to withdraw principal to meet your spending needs? - Could we look at both options? - Do you anticipate any major purchases during retirement, other than vehicles? - What do you plan on doing in retirement? Will it require additional spending? - We plan on buying an RV before we retire and travel. I anticipate spending $10,000 annually taking road trips. - Do you anticipate being out of debt when you retire? - Yes, we plan on being out of debt. - Do you plan on working part-time in retirement? - No, but I am willing to work part-time if necessary. Thanks! Steve Smith Steve.smith@gmail.com Question One: Calculate the annual savings amount for the Smith's using the Annuity Method. 20 points THE FAMILY Steve Smith, age 43, is a professor at Sample College. His wife, Sally, age 43, works in the IT Department at Sample College. Steve and Sally have been married for fifteen years and have three children from their marriage, Sara (age 13), Steve Jr. (age 10), and Sam (age 5). For retirement, they want to plan for 90% wage replacement at age 62 , without any consideration of Social Security. If they cannot achieve that they will consider a compromise between delaying retirement and lowering the wage replacement ratio as long as the wage replacement ratio is no less than 75% and the delayed retirement is no later than age 70 . They expect to live to age 90 . Steve Smith's Email to Bob Booth Dear Bob: Thanks for the list of questions. I am going to put my answers in red after each question to make it easier for both of us. - What is Steve's current income? - What is Sally's current income? - What is your current budget (in case something has changed)? I have attached our current budget. Fortunately, we have been able to implement many of your recommendations and decided to liquidate the Cornelius Inc. stock and the balance mutual fund to pay off our credit cards and vehicles. We have made other adjustments to our expenses and are in much better position than we were. - What is Steve's anticipated average annual salary increase? - What is Sally's anticipated average annual salary increase? - W 3% - What percentage of your current income do you anticipate needing in retirement? o 90% - What is the current balance in Steve's retirement account? What is the curen $50,000 - What is the current balance in Sally's retirement account? - What is Steve's retirement savings rate? o 6% - What is Sally's retirement savings rate? - 0% - Does Steve anticipate changing his savings rate? - Does Sally anticipate changing her savings rate? - - What is Steve's anticipated retirement age? - Age 62 - What is Sally's anticipated retirement age? - What is Sally's an 62 - How long does Steve expect to live in retirement? - 90 years old - What is Sally's anticipated retirement age? - Age 62 - How long does Steve expect to live in retirement? - 90 years old - How long does Sally expect to live in retirement? - 90 years old - Do you want to include Social Security in your retirement plan? - What rate of inflation would you like me to use? I would suggest three percent. - - 3\% is fine - What earnings rate would you like me to use? I would suggest eight percent. - 8% is fine In retirement, do you want to preserve the balance of your retirement savings, or is it okay to withdraw principal to meet your spending needs? - Could we look at both options? - Do you anticipate any major purchases during retirement, other than vehicles? - What do you plan on doing in retirement? Will it require additional spending? - We plan on buying an RV before we retire and travel. I anticipate spending $10,000 annually taking road trips. - Do you anticipate being out of debt when you retire? - Yes, we plan on being out of debt. - Do you plan on working part-time in retirement? - No, but I am willing to work part-time if necessary. Thanks! Steve Smith Steve.smith@gmail.com Question One: Calculate the annual savings amount for the Smith's using the Annuity Method. 20 points
