Reference no: EM133290609

Case: Jimmy Johnson is 25 years old. He and his wife Jane, 27 years old, have two children, Emmitt and Patricia, ages 3 and 5. 

Jimmy wants to retire in 35 years and build boats. He would like a nice retirement home with some land on a peaceful lake in the mountains of Georgia. Jimmy believes purchasing a home and lot in 35 years would cost $325,000 at today's prices. 

In forty years, Jimmy also believes he and Patricia can live comfortably on $60,000 a year in today's dollar terms. 

Realizing that retirement is only 35 years away and that they still have two children to raise and put through college, Jimmy thought he had better start saving for their retirement dreams. 

Also, Patricia is only 13 years away from college, and before Patricia finishes, Emmitt will be ready for school in 15 years. Currently, Jimmy has $20,000 in an emergency money market account, earning 1.5% interest compounded daily. 

His desire is to never have to use those emergency funds and that they will become a part of his estate. Jane and Jimmy also own their home with a market value of $275,000 and a mortgage of $175,000. 

The 3.75% mortgage has 27 years remaining, and the monthly payments are $860 for principal and interest. Jane is a healthcare professional and earns an annual salary of $65,000. Her employer puts an additional $5,000 each year into a 401(k) retirement plan. The employer 401k retirement amount currently has a balance of $19,000, and it is invested in a stock mutual fund, which has been earning an annual rate of return of 8.0%. 

With the current level of the United States federal debt, Jane and Jimmy are not counting on receiving any funds from social security at retirement. Jimmy is a stay-at-home dad and regularly earns additional income for the family as a carpenter, increasing his outside-the-home work as their financial plan dictates and his schedule and the economy allows. 

With all of the concern about college tuition increasing over the years, Jimmy believes that the children will go to the local junior college for their first two years and then a state school for their last two years. The cost to attend the local junior college is $6,000 per year today, and the cost to participate in a state school is $18,000 annually. 

Inflation will significantly impact Jane and Jimmy's future retirement and college plans for their children. Based on what he has read and heard on the news, Jimmy believes that inflation will average 3.0% per year for the next 35 years; however, the cost of a college education will increase by 4.0% per year for the junior college and state schools. 

Also, with the desirability of lakefront vacation homes, the house and property in Georgia will probably increase at a rate of 5.0% per year, while his current home will increase in value at a rate of 3.0% per year. Jane hopes and expects her annual salary will increase by at least 4.0% per year.

Question 1. Based on the home price inflation rates given, compute the value of the retirement home and Jimmy and Jane's current home when they want to retire in 35 years. 

Question 2. Based on the education inflation rates, compute the cost of college for Emmitt and Patricia when they will be attending school. Hint: Need to calculate the cost for each child's four years. 

Question 3. Based on the inflation rate given, compute the amount of money that Jimmy and Jane expect they will need to live on during their first year of retirement in 35 years. 

Question 4. If Jane receives her expected annual raises, what will be her salary at retirement? 

Question 5. If the emergency money market funds are not used during the next 35 years, what will be the value of the emergency fund at retirement? 

Question 6. If Jane's employer continues to put $5,000 every year into a 401(k) retirement and the account remains in the stock mutual fund, how much will be in the retirement account in 35 years? 

Question 7. Assuming that Jimmy and Jane have no money set aside for the children's college at this time, approximately how much will they have to save per month for Emmitt's education, for Patricia's education if they earn 6.0% on the college saving funds and keep it invested through the end of the last college tuition payment. Assume tuition payments are made in full at the start of a college year. Also, assume that up until school begins for each child, the investment account earns the same 8% as the 401k account. (Note that this question is a two-step process for each of Emmitt and Patricia's education.) 

Question 8. Assuming that at the date Jane retires, she wants enough income for 30 years of retirement and the inflation rate will remain at 2.0% per year, how much will Jimmy and Jane need to live on for the 30 years? (Hint: Use $165,000 for your payment variable.) 

Question 9. How much will Jimmy and Jane need to save per month to pay for their retirement income for 30 years, assuming that they can earn 7.0% per year, compounding monthly, on the invested funds? Assume Jimmy and Jane stop saving in 35 years when they reach 60, and funds are then held in a savings account earning zero. Further, assume that the 401k is NOT used for income, as it will be needed for a vacation home transition. (Hint: Use $6,500,000 as your total future value variable.) 

Question 10. Jane hopes that the money from her retirement funds, plus what they make on selling their current home when she is 60, will be enough to allow the purchase of the Georgia retirement home. Can this goal be realized? 

Question 11. Based on the level of savings that Jimmy and Jane need to achieve over the next 15 years, discuss the feasibility of his completing his objectives for his children's education and his retirement. 

Question 12. Discuss ways in which Jimmy and Jane can increase the probability of achieving their desired education and retirement goals. What role do risk and inflation play in the investment process?