Robert Johnson is 25 years old. He and his wife Jane have two children, Emmitt and...
Robert Johnson is 25 years old. He and his wife Jane have two children, Emmitt and Patricia, ages 2 and 4 respectively. Robert wants to retire in 40 years and build boats. He would like a nice retirement home with some land on a peaceful lake in the mountains of Georgia. Robert believes that to purchase a home and lot in 40 years would cost $300,000 in today’s prices. In forty years Robert also believes he and Patricia can live comfortably on $50,000 a year in today's dollar terms. Realizing that retirement is only 40 years away, and that he still had two children to raise and put through college, Robert thought he had better start saving for his retirement dreams. Also, Patricia is only 14 years away from college, and before Patricia finishes, Emmitt will be ready for school in 16 years. Currently Robert has $25,000 in an emergency money market account earning 2.0% interest compounded daily. His desire is to never have to use those emergency funds and that they will become a part of his estate. He also owns his own home that has a market value of $225,000 and a mortgage of $150,000. The 5.0% mortgage has 27 years remaining and his monthly payments are $1126 for principal and interest alone. Robert’s annual salary is $60,000. His employer puts an additional $3,000 into a 401(k) retirement plan. This retirement amount currently equals $9,000 and it is invested in a stock mutual fund, which has been earning an annual rate of return of 8.0%. With the current level of the federal debt, Robert is not counting on receiving any funds from social security at his retirement. With all of the concern about college tuition increasing over the years, Robert believes that the children will have to go to the local junior college for their first two years and then a state school for their last two years. The cost to attend the local junior college is $5,000 per year today, and the cost to attend a state school is $15,000 per year today. Inflation will have a great impact on Robert’s future retirement and college plans for his children. Based on what he has read and heard on the news, Robert believes that inflation will average 3.0% per year for the next 40 years; however, the cost of a college education will increase by 5.0% per year for the junior college and state schools. Also, with the desirability of vacation homes, the house and property in Georgia will probably increase at a rate of 5.0% per year, while his current home will increase in value at a rate of 3.0% per year. Robert hopes that his annual salary will increase by at least 4.0% per year. Note: For each of the computations completed below, answers can be stated to the nearest dollar. 1. If the emergency money market funds are not used, what will be the value of the funds at retirement? 2. Assuming that Robert’s employer continues to put $3,000 every year into a 401(k) retirement and the account remains in the stock mutual fund, how much will be in the retirement account in 40 years? 3. Assuming that Robert has no money set aside for his children’s college at this time, approximately how much will he have to save per month for Emmitt’s education, for Patricia’s education, if he earns 7.0% on the invested funds and the balance of education funds stays invested through the end of college. (Note that this question is a two-step process for each of Emmitt and Patricia’s education.) 4. Assuming that at the date Robert retires, he wants enough income for 25 years of retirement and the rate of inflation will remain at 3.0% per year, how much will Robert and Jane need to live on for the 25 years? (Hint: Use $160,000 for your payment variable.) 5. How much will Robert need to save per month to pay for Jane and his retirement income for 25 years assuming that Robert can earn 8.0% per year, compounding monthly, on the invested funds. Assume Robert and Jane stop saving in 40 years when they reach 65, and funds are then held in a savings account earning zero. Further, assume that the 401k is NOT used for income, as it will be needed for a vacation home transition. (Hint: Use $6,000,000 as your total future value variable.) Break down your answers.
Homework Answers
Due to time constraint I have uploaded my working upto 3rd question answer.
| Given data | |||||
| Particulars | Figure | Units | |||
| Age of Robert | 25 | yrs | |||
| Age of Emitt | 2 | yrs | |||
| Age of Patricia | 4 | yrs | |||
| Robert will retire after | 40 | yrs | |||
| Estimated cost of home after 40 yrs | 3,00,000 | $ | |||
| Funds in emergency money market fund | 25,000 | $ | |||
| Rate of interest of above | 2 | % compounded daily | |||
| Current market value of Robert's home | 2,25,000 | $ | |||
| Mortgage taken for above | 1,50,000 | $ | |||
| Rate of interest of above | 5 | % | |||
| Remaining term | 27 | yrs | |||
| Monthly payments for repaying the above | 1,126 | $ | |||
| Robert's current annual salary | 60,000 | $ | |||
| Employer's contribution to 401(k) retirement plan | 3,000 | $ | |||
| Current value of retirement plan | 9,000 | $ | |||
| Annual rate of return on stock mutual fund | 8 | % | |||
| Cost to attend junior college | 5,000 | $ per yr | |||
| Cost to attend state school | 15,000 | $ per yr | |||
| Inflation rate per year | 3 | % | |||
| Rate of increase of college education per year | 5 | % | |||
| Rate of increase of value of retirement home per year | 5 | % | |||
| Rate of increase of value of current home per year | 3 | % | |||
| Annual salary rate of increase per year | 4 | % | |||
| Q1. If the emergency money market funds are not used, what will be the value of the funds at retirement | |||||
| Ans. | |||||
| Funds in emergency money market fund | 25000 | $ | |||
| Rate of interest of above | 2 | % compounded daily | |||
| Effective annual rate of interest = | 2.0201% | ||||
| (1+0.02/365)^365-1 | |||||
| Hence value of emergency money mkt funds after 40 years = | 55,637.30 | $ | |||
| 25000*(1+0.02/365)^(365*40) | |||||
| Q2. Assuming that Robert’s employer continues to put $3,000 every year into a 401(k) retirement and the account remains in the stock mutual fund, how much will be in the retirement account in 40 years? | |||||
| Ans. | |||||
| Employer's contribution to 401(k) retirement plan | 3,000 | $ | |||
| Current value of retirement plan invested in stock mutual fund | 9,000 | $ | |||
| Annual rate of return on stock mutual fund | 8 | % | |||
| Funds in the retirement plan after 40 years = | 26,15,942.58 | $ | |||
| 9000+3000*(1+0.08)^40 | |||||
| Q3. Assuming that Robert has no money set aside for his children’s college at this time, approximately how much will he have to save per month for Emmitt’s education, for Patricia’s education, if he earns 7.0% on the invested funds and the balance of education funds stays invested through the end of college. (Note that this question is a two-step process for each of Emmitt and Patricia’s education.) | |||||
| Ans. | |||||
| Current Cost to attend junior college | 5,000 | $ per yr | |||
| Current Cost to attend state school | 15,000 | $ per yr | |||
| Age of Emitt | 2 | yrs | |||
| Age of Patricia | 4 | yrs | |||
| Inflation rate per year | 3 | % | |||
| Rate of increase of college education per year | 5 | % | |||
| Calculation of monthly saving amount for Emitt's education | |||||
| Emitt will attend college after | 16 | yrs | Monthly cost/saving required | ||
| Hence cost of junior college after 16 years will be = | 10,914.37 | for 1st yr | 909.53 | ||
| 5000*(1.05)^16 | |||||
| and 5000*(1.05)^17 | 11,460.09 | for 2nd yr | 955.01 | ||
| To attend state school after 18 yrs cost will be | |||||
| 15000*(1.05)^18 | 36,099.29 |
Know the answer?
Add Answer to:
|
Your father is 50 years old and will retire in 10 years. He
expects to live for 25 years after he retires, until he is 85. He
wants a fixed retirement income that has the same purchasing power
at the time he retires as $50,000 has today. (The real value of his
retirement income will decline annually after he retires.) His
retirement income will begin the day he retires, 10 years
from today, at which time he will receive 24...
Tony has two children, Angelo age 8 and jessica age 5. Tony wants to provide for their education funding Currently, tuition is $12.000 per year and tuition inflation is 6. Tony expects to earn 8% on his investments and he expects the children to start college at age 18 and go to college for 4 years. Tony wants his last savings payment to be made when the oldest child starts college. How much must Tony save at the end of...