Question

In: Accounting

2. Lakned Jones is fifty years old. He is working with you, his financial planner, to...

2. Lakned Jones is fifty years old. He is working with you, his financial planner, to calculate his long-term care insurance need. Please use the following assumptions to calculate Lakned’s net LTC need:

· Current Annual Cost of LTC: $73,000

· Age at which Lakned will need LTC Services: seventy

· LTC Inflation Rate: 4.50 percent

· Number of Years Benefits will be Needed: sixBefore-Tax Rate of Return: 7 percent

· Marginal Tax Bracket: 24 percent

· Annual Increase in Savings: 0 percent

· Current Value of Assets Set Aside for LTC Need: $100,000

Solutions

Expert Solution

Lakned Jones current age 50

Age estimated to begin long-term care 70

Annual cost of long-term care in today's dollars $73,000

Annual long-term care inflation 4.50%

Number of years estimated to need long term care 6

Value of funds already set aside by you for long term care $100,000

Before-tax return 7.00%  

Marginal tax bracket 24.00% Annual increases 0.00%

Your future long-term care needs total $1,182,543.

You have available assets of $100,000. To self-insure you will need to save $20,929 per year increasing at 0.0%, or, you can set aside a lump sum of $267,397 today and let it accumulate interest until needed. Alternatively, you could consider purchasing a long-term care insurance policy to cover the potential future expenses.

After tax interest = 7 % - 24% = 5.32%

so after tax interest first year = 120929*5.32% = 6433

Year Beginning Capital Annual Savings LTC Need Net Captital After-Tax Interest Ending Capital
1 $100,000 $20,929 $0 $120,929 $6,433 $127,363
2 127,363 20,929 0 148,292 7,889 156,181
3 156,181 20,929 0 177,110 9,422 186,532
4 186,532 20,929 0 207,462 11,037 218,498
5 218,498 20,929 0 239,428 12,738 252,165
6 252,165 20,929 0 273,094 14,529 287,623
7 287,623 20,929 0 308,552 16,415 324,967
8 324,967 20,929 0 345,896 18,402 364,298
9 364,298 20,929 0 385,227 20,494 405,721
10 405,721 20,929 0 426,650 22,698 449,348
11 449,348 20,929 0 470,277 25,019 495,296
12 495,296 20,929 0 516,225 27,463 543,689
13 543,689 20,929 0 564,618 30,038 594,655
14 594,655 20,929 0 615,585 32,749 648,334
15 648,334 20,929 0 669,263 35,605 704,868
16 704,868 20,929 0 725,797 38,612 764,409
17 764,409 20,929 0 785,338 41,780 827,118
18 827,118 20,929 0 848,048 45,116 893,164
19 893,164 20,929 0 914,093 48,630 962,723
20 962,723 20,929 0 983,652 52,330 1,035,982
21 1,035,982 0 176,055 859,927 45,748 905,675
22 905,675 0 183,978 721,697 38,394 760,092
23 760,092 0 192,257 567,835 30,209 598,044
24 598,044 0 200,908 397,136 21,128 418,263
25 418,263 0 209,949 208,314 11,082 219,397
26 219,397 0 219,397 0 0 0

ekkarill92 answered 1 year ago
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