RETIREMENT BENEFITS

1. Jerry and Jenny needs to save money to fund their son, Jazz’s college education fees after 18 years from now.

The current cost of college’s annual fee is $20,000. This cost is increasing at the rate of 7% per annum. Therefore the annual college fees 18 years hence would be:

= 20,000 × (1.07)18

= $ 67,598.95 or $ 67,600.00 (approx.)

The value of total college fees required after 18 years and their present values today =

The present value of the total college fee required now is = $ 57565.54

2. Jenny plans to retire at the age of 67 and expects to live for 100 years. This means that they have 33 years of post retirement life. For all these 33 years they need $ 150,000 per annum (in today’s dollars).

The amount of dollars required at the value 42 (i.e. 67-25) years hence =

= $ 150000 (1.03)42

= $ 519,104.38 or $ 519,105.00 (approx.)

And the value of $ 40,000 to be received from social security 42 years hence =

= $ 40,000 (1.03)42

= $ 138,427.84

Therefore total requirement and their present value are:

Therefore the present value of the money require for annuity receivable at retirement is $ 117,651.74 or $ 117,650.00 (approx.).

3. Jerry and Jenny are expected to require the funds for two fulfill their tow major needs: one the higher education of their son Jazz and two, their post retirement pension. The couple needs to save the money enough to have a present value to meet these requirements in future.

The current value (in today’s terms) for these two major requirements is $ 57,565.54 and $117,650.00 respectively. So the couple’s requirement in today’s term is $ 175,217.28. The calculations for the same can be seen in the answers to the above two parts.

4. The total requirement of the couple to meet its financial goals in the future are $ 175,217.28 (in present $ terms), whereas they have a current total savings of $ 100,000 only. Therefore they need to make further investments (either lump-sum or in parts) in order to achieve their goals.

5. For funding their son Jazz’s education cost, either they need to set aside an equated instalment every year (at the 10% rate of interest) equal to:

=

= $ 7018.98

Or we can also assume that it will be funded by a part of the current savings of $ 100,000.00 in today’s dollar terms.

And for funding for the retirement needs, they need $ 117,650. This can be funded by the remaining part of the present savings of $ 42,434.46 plus annual equated instalments into savings fund of:

=

= $ 7,661.63

Therefore, the couple needs an annual savings of $ 7661.63 in order to fund its two major expected financial goals of the future. They need to increase the amount of annual savings from current level of $ 5,000.00, annually.

Or else, the couple can save a lump-sum amount of $ 75,217.28 in the investment yielding 10% rate of interest. This amount will be sufficient to attain the couples’ financial goals in the future.

6. The main advantages of two accounts or two financial instruments to save for the two major financial goals of retirement money and college fees for Jazz is that it reduces the risk related to investments. It is a risk mitigation technique. Even in case one of the investment’s values goes down or becomes irrecoverable in future, the other one is safe at-least. Also the purpose for which the savings are made does not get mixed; there is a clear demarcation as to purpose for which the said savings are made.

The main disadvantage of two accounts or two financial instruments to save for the two major financial goals of retirement money and college fees for Jazz is that it involves complexity of managing the two accounts. Also when the two accounts or instruments are similar in nature, the purpose of diversity also remains unresolved.

Therefore in my opinion if the instruments in which the investments are to be made are same in nature, it is better to make investment in one account. However, if the couple plans to diversify, than investment in different instruments for each of the two goals is a better and safer option.