Reference no: EM133715835

Case: The Patels are looking to retire at age 65, as described in detail in the RETIREMENT INFORMATION section of the case study. What balance do they need on the first day of retirement to support this goal, taking their Social Security benefit into account? Assume a 7% investment return on their retirement portfolio before they retire and a 5% return after they retire, and that inflation will average 3% for their entire lives.

RETIREMENT INFORMATION

John and Asha would like to retire at age 65. They expect their living expenses in their first year of retirement to be equivalent to 70% of their current earned income (as adjusted for inflation). They assume their life expectancy in retirement will be 30 years. John has a rollover IRA from a previous employer's 401(k) plan, invested in a low-cost 2045 target date fund with a major investment firm. Historically, the two major asset classes in the fund are large cap domestic stocks and corporate bonds. He has not made IRA contributions. Asha's IRA (also a rollover from a previous employer's plan) is invested in the same mutual fund as John's. She has not made IRA contributions. Asha defers 10% of her salary ($102,000) into a 403(b) associated with the university. The university matches the first 5% of salary contributed, dollar for dollar. The employer contribution is subject to a vesting schedule, and Asha will be 100% vested in 6 months. The account is invested in a large cap/growth mutual fund. They consulted the Social Security Administration website and determined their monthly retirement benefits at FRA would be $2,100 (in today's dollars) for John and $2,600 (in today's dollars) for Asha. The current value of Playful Paws, Inc. is $400,000. However, John is hoping one of the children will get involved in the business. and therefore he does not want to include the business's value in the assets available to fund retirement. As the children age, he will reevaluate his plans for the business