Your clients, John and Jane Smith, have come to you for assistance with their financial plan. They provide you with the following information:

John (age 44)

• Earns $104,000 annually working at Spacely Sprockets
• Contributes $1,625 to his 401(k) each month
• Employer matches 100% of the first 3% and 50% of the next 2% of Johns salary
• Would like to retire at age 67
• Social Security benefit estimate in todays dollars is $2,050/month at age 67

Jane (age 44)

• Earns $31,000 working part-time from home as a graphic artist
• Contributes $7,750 per year to a Simplified Employee Pension (SEP) plan
• Would like to retire at the same time as John
• Social Security benefit estimate in todays dollars in $1,725/month at age 67

Family

• Children: Bill (age 9) and Susie (age 5)
• Bill has a 529 Plan with a balance of $23,500
• Susie has a 529 Plan with a balance of $12,000
• $1,800 is being contributed to each childs 529 plan at the end of each year.

Expectations

• John and Jane would like to have $125,000/year (in todays dollars) at retirement
• Neither John or Jane expect their earnings to change before retirement
• Both Bill and Susie will go to America University
  • Currently, one year of tuition is $13,200 and they expect to pay for 5 years of school per child
  • The Smiths believe the cost of tuition will increase at a rate of 6% per year until the time both children graduate
• The Smiths expect inflation to average 3% per year during their lifetime
• John and Jane each expect to live to age 95
• They expect their invested money to average a 9% per year return during their lifetime

Additional Information about the Smiths

• Current net worth is $1,072,000
• Liabilities
  • Home mortgage: $325,000 (12 years left at $1,800/month)
  • Auto loan: $17,000 (2 years left at $730/month)
  • Credit Card: $8,400 (paying $450/month)
• Cumulative living expenses (food, utilities, fuel, clothing, etc.): $1,700/month
• Effective income tax rate is 18%

Assets

• Home value is $575,000

• Johns 401(k) balance is $625,000
• Janes SEP balance is $95,000
• Investment account balance is $45,000
• Bank CD balance is $75,000 (at 1.5% interest) and is maturing in nine months.
• Checking account balance is $7,400

_ _ _

Based upon the information provided, answer the following questions in its own paragraph. Use a narrative format as if you are having a conversation with the Smiths. Supporting calculations can be referenced in an Appendix.

5. Using the Capital Preservation Method, calculate how much capital the couple needs to retire at their goal ages using only retirement account assets.