Mini Case Problems

Question

Work on the following mini case problems:

1.) Marybeth and Anneal are beginning to contemplate retirement. They have saved a total of \$ 500,000 for retirement and they are each just 45 years old. They realize that they have not saved sufficiently to be able to retire early, fully retire without some part-time employment, or replace 100% of their preretirement income. But they are willing to explore different avenues.

Marybeth and Anneal have a combines annual income of \$ 125,00 and believe that their salaries will keep pace with inflation at 4% per year. They are also comfortable assuming that the effective annual rate of return for their retirement assets will be 9% before retirement and 6.5% after retirement. For now, Marybeth wants to keep the planning simple, projecting that they will both die in exactly 40 years and that their retirement assets will be depleted with the exception of \$ 100,000 to cover funeral and burial costs.Lastly,they do not want to continue saving after they retire(either partly or fully)

As their financial planner, provide some assistance with these calcualtions.The two primary options are listed below. Considering all previous information which outcome requires the lowest monthly(end of month) contributions if they also require that their retirement annuity grow by 4% per year to keep pace with inflation?(Ignore the effects of income taxes and social security on the answer).

a.)To retire at age 55 with an income replacement ratio of 60%
b.)To retire at age 65 with an income replacement ratio of 100%

2.)Tara age 44 plans to retire at age 67.Her life expectancy, accounting for family medical history, is age 97.Tara is single and currently earns\$56,000 per year as a university librarian. At her normal retirement age she expects to receive
\$ 28,700 in Social Security benefits(today’s dollars)She will also receive a small defined benefit pension in the amount of \$13,500 from a local municipality. She has come to you to determine weather she is on track to meet her retirement goals. Use the following assumptions and information to answer the questions that follow:

• She would like to use a 90% income replacement ratio, based on current earnings.
• She is currently contribution \$ 2,400 per year into a 403(b) plan no employer match.
• Inflation is assumed to be 3.50%
• She can earn a 6.50% after tax rate of return on assets before retirement.
• She can earn 4.50% after tax rate of return on assets after retirement.

a.)How much does Tara need, on her first day of retirement ,to fund a capital depletion model of retirement?
b.)Given her current level of savings, is Tara on target to reach her retirement goal.?
c.)If she has a shortfall, how more must she save per year to reach her goal.
d.)If she would like to obtain a capital preservation goal for retirement, how much will she need to have saved on her first day of retirement.
e.) Given a capital preservation goal, is she saving enough on a yearly basic currently?
f.)How much, in total must she save yearly to reach a capital preservation model of retirement?

3.) Annette Robinson is a 63 year old recent widow and is attempting to do some tax and investment planning pertaining to her late husband’s traditional IRA account. She has sought your advice as to the best course of action. She has informed you that her husband was 69 at the time of his death and had not begun taking his RMD.

a.) What are the three distributions methods available to Annette?
b.)Which method should she choose to maximize tax deferral? Based on the appropriate life table how much would her first required distribution be? When would this distribution happen?
c.)Which method should she choose to maximize the distribution? Based on the appropriate life table, how much would her first required distribution be? When would this distribution happen?
d.)Which alternative would not have been available had her husband begun his required distributions?
e.) If Annette had been younger than 59,which alternative would allow her to take distributions without incurring the tax penalty?

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