Reference no: EM132455632

Victor, now aged 61, and Maria, aged 59, are retiring at the end of the year. Since his retail management employer changed from a defined-benefit to a defined-contribution retirement plan ten years ago, Victor has been contributing the maximum amount of his salary to several different mutual funds offered through the plan, although his employer never matched any of his contributions. Victor's tax-sheltered plan, which now has a balance of $144,000, has been growing at a rate of 7 percent through the years. Under the previous defined-benefit plan, Victor is entitled to a single-life pension of $360 per month or a joint and survivor option paying $240 monthly. The value of Victor's investment of $20,000 in Pharmacia eight years ago has now grown to $56,000.

Maria's earlier career as a medical records assistant provided no retirement program, although she did save $10,000 via her credit union, which was later used to purchase zero-coupon bonds now worth $28,000. Maria's second career as a pharmaceutical representative for Pharmacia allowed her to contribute about $37,000 to her retirement account over the past nine years. Pharmacia matched a portion of her contributions, and that account is now worth $130,000; its growth rate has been about 6 to 10 percent annually. When Maria's mother died last year, she inherited her mother's home, which is rented for $900 per month; the house has a market value of $170,000. The Hernandezes' personal residence is worth $180,000. They pay combined federal and state income taxes at a 30 percent rate.

1. Sum up the present values of the Hernandezes' assets, excluding their personal residence, and identify which assets derive from tax-sheltered accounts.

2. Assume that the Hernandezes sold their stocks, bonds, and the rental property, realizing a gain of $238,000 after income taxes and commissions. If that amount earned a 7 percent rate of return over the Hernandezes' anticipated 20 years of retirement, how large an amount could be withdrawn each month? How large a monthly amount could be withdrawn if the proceeds earned 6 percent for 20 years?  for 30 years? Use the information from Appendix A.4, or this calculator from interest.com to make your calculations.

3. Victor's $144,000 and Maria's $130,000 in retirement have been sheltered from income taxes for many years. Explain the advantages the couple received by leaving the money in the tax-sheltered accounts. Offer them a rationale to keep the money in the accounts as long as possible before making withdrawls.