Question

Your clients, Jerry and Jenny, are 25 years old. They have come to you for assistance with planning for the cost their child’s education and their retirement. They would like to know if they are on track to reach these two goals. Below are the facts about the family. • Jenny currently earns $150,000 and they expect to need $150,000 per year in today’s dollars in retirement. Jerry is a stay-at-home dad. • Jenny plans to retire at age 67, and they expect to live until age 100. • They also expect that Social Security will provide $40,000 of benefits in today’s dollars at age 67. • Jenny has been saving $5,000 annually in her 401(k) plan. • Their son, Jazz, was just born and is expected to go to college in 18 years. • They want to save for Jazz’s college education, which they expect will cost $20,000 in today’s dollars per year and they are willing to fund 5 years of college. They want all funds needed for Jazz’s college education available the first year Jazz starts college. • They were told that college costs are increasing at 7% per year, while general inflation is 3%. • They currently have $100,000 saved in total and they are averaging a 10% rate of return and expect to continue to earn the same return over time.

Using calculations and explanations provide the couple with three alternatives for meeting their goals.

Answer 1

Let us first list the given parameters;

		Jenny		1
	Current earnings	150000
	Present age	25
	Retirement age	67
	Expected life till	100
	Funds at age 67 (at todays value)
	- social sec amount to receive	40000
	Current savings p.a.	5000
	Presently available fund	100000
	(return on investment @10%)
1	Retirement requirement:
	150,000 per year
2	Child Education fund required:
	Time for fund requirement for Child education-Yrs	18
	Fund required p.a for 5 yrs	20000
	(- All Fund required in year 0)
	Inflation in college fees p.a.	7%
	Estimation of fund required:
	College fees in Year 18	63176
	Add: next 4 years requirement	300134
	Total fund required	363310	(at future value)
	- This is required in year 1 itself
Solution: 1 At current savings of only $5000 p.a., they can manage only till her 83rd age.\ 2 If savings is increased at the rate of inflation ie., 3%, the couple can manage till her 90th age 3 Return on investment is taken at same 10% p.a. (on opening fund balance) 4 The suggested way forward solutions are; a. The funds can be shifted to top rated equity mutual funds, so that on avg,       a return of 13% can be expected. In that case, she can comfortably achieve the       targeted goals of both education and retirement. b. Alternatively, they can expect the son to support them for the shortfall, after       he starts earning.