Reference no: EM132887536

Your clients, George and Jane Jetson, have come to you for assistance with their financial plan. They provide you with the following information:

George (age 44)

• Earns $104,000 annually working at Spacely Sprockets
• Contributes $1,625 to his 401(k) each month
• Employer matches 100% of the first 3% and 50% of the next 2% of George's salary
• Would like to retire at age 65
• Social Security benefit estimate in today's dollars is $2,050/month at age 67

Jane (age 44)

• Earns $31,000 working part-time from home as a graphic artist
• Contributes $7,750 per year to a Simplified Employee Pension (SEP) plan
• Would like to retire at the same time as George
• Social Security benefit estimate in today's dollars in $1,725/month at age 67

Family

• Children: Judy (age 9) and Elroy (age 5)
• Judy has a 529 Plan with a balance of $23,500
• Elroy has a 529 Plan with a balance of $12,000
• $150/month is being contributed to each child's 529 plan

Expectations

• George and Jane would like to have $125,000/year (in today's dollars) at retirement
• Neither George or Jane expect their earnings to change before retirement
• Both Judy and Elroy will go to Galaxy University

1. Currently, one year of tuition is $13,200 and they expect to pay for 5 years of school per child
2. The Jetsons believe the cost of tuition will increase at a rate of 6% per year until the time both children graduate

• The Jetson's expect inflation to average 3% per year during their lifetime
• George and Jane each expect to live to age 95
• They expect their invested money to average a 9% per year return during their lifetime

Additional Information about the Jetsons
Current net worth is $1,072,000
Liabilities

• Home mortgage: $325,000 (12 years left at $1,800/month)
• Auto loan: $17,000 (2 years left at $730/month)
• Credit Card: $8,400 (paying $450/month)

Cumulative living expenses (food, utilities, fuel, clothing, etc.): $1,700/month
Effective income tax rate is 18%

Assets

• Home value is $575,000
• George's 401(k) balance is $625,000
• Jane's SEP balance is $95,000
• Investment account balance is $45,000
• Bank CD balance is $75,000 (at 1.5% interest)
• Checking account balance is $7,400

Problem 1: Using the Capital Preservation Method, calculate how much capital the couple needs to retire at their goal ages using only retirement account assets.

Problem 2: Using the Purchasing Power Preservation Method, calculate how much capital the couple needs to retire at their goal ages using only retirement account assets.