Question

Jamal and Chyna Gwynn

6.Your clients, Jamal and Chyna Gwynn, would like you to determine if they are on track to meet the education funding objective of their son Jarius. Jarius is currently 13 years of age. Jamal and Chyna have high hopes for Jarius’s future education. Use the following data to determine whether or not Jamal and Chyna need to save more to fund Jarius’s educational need.

•Combined federal and state marginal tax bracket: 29 percent

•After-tax rate of return before college: 7.90 percent

•Before-tax rate of return of 529 plan: 9.75 percent

•Rate of return on educational assets after college begins: 5 percent

•College expense inflation rate: 4 percent

•Year Jarius begins college: Age eighteen

•Number of years in college: four years

•Yearly cost of college today: $60,000

•After-tax assets earmarked for Jarius’s education: $25,000

•529 plan assets earmarked for Jarius’s education: $60,000

•After-tax educational annual savings: $0

•Annual tax-advantaged educational savings: $18,000

•Annual education savings growth rate: 3 percent

a.Approximately how much will Jamal and Chyna need (gross need) on Jarius’s first day of college?

b.After accounting for the future value of assets and savings, how much additional (if any) do Jamal and Chyna need on Jarius’s first day of college?

c.Based on your answer to the question above, how much must Jamal and Chyna save annually in the 529 plan to meet the educational saving goal?

d.If instead, Jamal and Chyna decide to save outside of a 529 plan or other tax-advantaged plan, how much must they save each year?

Answer 1

Answer A.
Jariu's Future Education Needs
Age	Calculation for Inflation	Inflation-Adjusted College Fee	Discount Factor @7.9%	Total Payment
18	60,000 * (1 + 0.4)^(18-13) =	72,999.17	1.00	72,999.17
19	60,000 * (1 + 0.4)^(19-13) =	75,919.14	0.93	70,361.86
20	60,000 * (1 + 0.4)^(20-13) =	78,955.91	0.86	67,815.23
21	60,000 * (1 + 0.4)^(21-13) =	82,114.14	0.80	65,362.86
Gross Net Payment	276,539.12
Answer B.
Jariu's Future Education Needs
Age	Calculation for Savings	Savings for College Fee	Return Factor @5%	Value at the Time of Admisison
13	18,000 * 1 =	18,000.00	1.22	21,879.11
14	18,000 * (1 + 0.3)^1 =	18,540.00	1.16	21,462.37
15	18,000 * (1 + 0.3)^2 =	19,096.20	1.10	21,053.56
16	18,000 * (1 + 0.3)^3 =	19,669.09	1.05	20,652.54
17	18,000 * (1 + 0.3)^4 =	20,259.16	1.00	20,259.16
Total Value of Savings	105,306.74
Initial Asset Value = (60,000 + 25,000) * (1.05)^5 = 108,483.9328
Additional Fund Requirement = 276,539.1203 - 105,306.7394 - 108,483.9328 = 62,748.44809

Answer C.
Jariu's Future Education Needs
Additional Investment Required = 62,748.44809 / 1.21550625 = 51,623.30353
Answer D.
Jariu's Future Education Needs
Plan of Saving Amount each year = 62,748.44809 / (1.22 + 1.16 + 1.10 + 1.05 + 1) = 11,346.91647

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