Question

Ann, 49, and Amos 51, are married and both work. Ann earns $57,500 and Amos earns $60,500. They have annual investment income of $2,500. Their children are grown and out of the house. The couple have saved a total of $300,000 in 401k accounts and $50,000 total in traditional IRA accounts. Their investment income terminates at age 64. They plan to retire at age 65. Their expenses, including deferred retirement contributions, taxes, and household expenses total $102,000 annually.

They plan to continue to each defer $18,500 into their 401k account and a total of $10,000 in their traditional IRA accounts. They are moderately conservative in investment style/risk tolerance. They are not interested in aggressive investments.   The stock market is expected to generate an approximate 7% pre-tax return on a long-term basis. Bonds yield 4.00 % long-term and money market funds yield 2.0%.

They insure each other for $100,000 using term life insurance policies.

They have come to you specifically for retirement planning. Their goal is to have about $2,500,000 in retirement assets at age 65.

Answer the following:

1. Are they able to make additional tax-deferred payments? If so, how much?

2. If they continue their deferred annual payments until age 65 for Amos and 64 for Ann, assuming no new sources of deferral, how much will they have accumulated in their tax – deferred accounts by the time Amos reaches age 65?

Answer 1

1
Current income and expense
Amos	60,500
Ann	57,500
Investment income	2,500
Annual expense	102,000
Current total annual income	120,500	=60500+57500+2500
Current total annual expense	102,000
Surplus income	18,500	=120,500-102,000

Hence, they have a surplus income left after taking care of all the expenses, taxes and retirement contribution of $18,500. They can contribute this income to the retirement savings. The assumption is- there is no cap on the maximum amount that can be contributed to the tax deferred account (401K + IRA both combined)

2
continue their deferred annual payments
Current contribution to tax deferred accounts
401K Amos	18,500
401K Ann	18,500
IRA	10,000
Accumulated savings
401K	300,000
IRA	50,000
Current ages-
Amos	51
Ann	49
Retirement age
Amos	65
Ann	65
Time till Amos is 65
Amos	14
Ann	16
Returns
Stock market	7%
Bonds	4%
Money market	2%

We are free to chose the optimum investment mix for the couple, based on the risk tolerance provided as moderately conservative. They have long horizon (14 years) for investment, have additional surplus income, no other liability. This will make their risk taking capacity as moderate to high. However, their willingness is moderate to low.
Lets assume an investment portfolio as follows that will suite their risk tolerance-

Stock market	40%
Bonds	40%
Money market	20%

Expected portfolio returns	4.80%	=40%*7%+40%*4%+20%*2%
FV=	$1,583,177.12	=FV(4.8%,14,-(18500+18500+10000),-(300000+50000),0)

Hence, by the time Amos turns 65, they would have accumulated a total of $1.583 Mn in their tax deferred accounts, if they continued their current rate of contribution.