Reference no: EM133147095

Question - Jimmy Johnson is 25 years old. He and his wife Jane, 27 years old, have two children, Emmitt and Patricia, ages 3 and 5 respectively. 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 that to purchase a home and lot in 35 years would cost $325,000 in 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 that has 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 health care 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 he 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 attend a state school is $18,000 per year today.

Inflation will have a great impact on 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.

Assuming that 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?