All the dollar figures are in today’s dollars. Planner Lopez notes that the current inflation rate is 1.3%, but to be cautious he assumes it will be 2% per annum in the future. They can invest their money at 8% nominal rate until retirement and then will be more conservative in their portfolio and earn 6% p.a. throughout retirement.
Their marginal tax rate is 42.7% now. It will drop to 31% when they retire
Question: Do they save enough with this plan to meet their retirement goal?
These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice. Unethical use is strictly forbidden.As the fees for son and daughter's college education is not given, it is assumed that the savings and interest earned on the investment would be sufficient to cover the college fees.
Since the figures are in today's dollars, all the cash flows are in real terms and the interest rates have also been adjusted for inflation to reflect the real rates of return.
As savings are after tax, tax rate is not considered for calculations. It is assumed that the interest earned on investment would be offset by other strategies and the tax liability would be nil.
Real return before retirement 6.61% (It is assumed that inflation will be 2% after retirement)
Real return after retirement 3.92% ...
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