Case 11-2 Planning for Retirement
Jimmy and Jane Have Goals
Jimmy Johnson is 25 years old. He and his wife Jane, 27 years old,
have two children, Emmitt and Patricia, ages 3 and 5 respectively.
Jimmy wants to retire in 35 years and build boats. He would like a
nice retirement home with some land on a peaceful lake in the
mountains of Georgia. Jimmy believes that to purchase a home and
lot in 35 years would cost $325,000 in today’s prices. In forty years
Jimmy also believes he and Patricia can live comfortably on $60,000 a
year in today's dollar terms.
Realizing that retirement is only 35 years away, and that they still
have two children to raise and put through college, Jimmy thought he
had better start saving for their retirement dreams. Also, Patricia is
only 13 years away from college, and before Patricia finishes, Emmitt
will be ready for school in 15 years. Cu
ently Jimmy has $20,000 in
an emergency money market account earning 1.5% interest
compounded daily. His desire is to never have to use those emergency
funds and that they will become a part of his estate. Jane and Jimmy
also own their home that has a market value of $275,000 and a
mortgage of $175,000. The 3.75% mortgage has 27 years remaining
and the monthly payments are $860 for principal and interest.
Jane is a health care professional and earns an annual salary of
$65,000. Her employer puts an additional $5,000 each year into a
401(k) retirement plan. The employer 401k retirement amount
cu
ently has a balance of $19,000 and it is invested in a stock mutual
fund, which has been earning an annual rate of return of 8.0%. With
the cu
ent level of the United States federal debt, Jane and Jimmy are
not counting on receiving any funds from social security at retirement.
Jimmy is a stay-at-home dad and he regularly earns additional income
for the family as a carpenter, increasing his outside the home work as
their financial plan dictates and his schedule and the economy allows.
With all of the concern about college tuition increasing over the years,
Jimmy believes that the children will 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 $6,000 per year today,
and the cost to attend a state school is $18,000 per year today.
Inflation will have a great impact on Jane and Jimmy’s future
etirement and college plans for their children. Based on what he has
ead and heard on the news, Jimmy believes that inflation will average
3.0% per year for the next 35 years; however, the cost of a college
education will increase by 4.0% per year for the junior college and
state schools. Also, with the desirability of lakefront vacation homes,
the house and property in Georgia will probably increase at a rate of
5.0% per year, while his cu
ent home will increase in value at a rate
of 3.0% per year. Jane hopes and expects her 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.
Questions
1. (5 points) Based on the home price inflation rates given, compute
the value of the retirement home and Jimmy and Jane’s cu
ent
home when they wants to retire in 35 years.
2. (5 points) Based on the education inflation rates given, compute
the cost of college for Emmitt and Patricia when they will be going
to school. Hint: Need to calculate a cost for each of four year, for
each child.
3. (5 points) Based on the inflation rate given, compute the amount of
money that Jimmy and Jane expect they will need to live on during
their first year of retirement in 35 years.
4. (5 points) If Jane receives her expected annual raises, what will be
her salary at retirement?
5. (5 points) If the emergency money market funds are not used
during the next 35 years, what will be the value of the emergency
fund at retirement?
6. (5 points) Assuming that Jane’s employer continues to put $5,000
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
35 years?
7. (10 points) Assuming that Jimmy and Jane have no money set
aside for the children’s college at this time, approximately how
much will they have to save per month for Emmitt’s education, for
Patricia’s education, if they earn 6.0% on the college saving funds
and keep it invested through the end of the last college tuition
payment. Assume tuition payments are made in full at the start of a
college year. Also assume that up until school begins for each child
the investment account earns the same 8% as the 401k account.
(Note that this question is a two-step process for each of Emmitt
and Patricia’s education.)
8. (10 points) Assuming that at the date Jane retires, she wants
enough income for 30 years of retirement and the rate of inflation
will remain at 2.0% per year, how much will Jimmy and Jane need
to live on for the 30 years? (Hint: Use $165,000 for your payment
variable.)
9. (10 points) How much will Jimmy and Jane need to save per month
to pay for their retirement income for 30 years assuming that they
can earn 7.0% per year, compounding monthly, on the invested
funds. Assume Jimmy and Jane stop saving in 35 years when they
each 60, 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
$6,500,000 as your total future value variable.)
XXXXXXXXXXpoints) Jane hopes that the money from her retirement
funds plus what they makes on the sale of their cu
ent home when
she is 60, will be enough to allow the purchase of the Georgia
etirement home. Can this goal be realized?
XXXXXXXXXXpoints) Based on the level of savings that Jimmy and Jane
needs to achieve over the next 15 years, discuss the feasibility of
his achieving his objectives for his children’s education and his
etirement.
XXXXXXXXXXpoints) Discuss ways in which Jimmy and Jane can increase
the probability of achieving his desired education and retirement
goals. What role does risk and inflation play in the investment
process?
An additional 10 points is awarded based on overall completeness and
organization.
Jimmy and Jane Have Goals
Questions