1. Tarek is 56 years old and wants to retire in 10 years. He has calculated that he will need the equivalent of $4,000 per month (in today's dollars) to maintain his lifestyle. Tarek would like to know how much he needs in an account on his first day of retirement to fully fund his expenses until age 86. For planning purposes, assume that he can earn 7% on his investments before and after retirement. If inflation averages 2.5% over the entire period, how much income must Tarek generate on his first day of retirement to keep pace with inflation?
2. Now you know how much income he will need on his first day of retirement. Of course, he will need to fund more than one year of income from a pool of saved assets. Tell Tarek how much he needs to accumulate, as of the 1st day of retirement, to fully fund his retirement income needs. For planning purposes, base your calculations on a monthly estimate and account for inflation.
3. Tarek is anxious to start a retirement savings plan. He looked at your numbers from question #2 and determined that he wanted to save for a "round" number. So, he would like to know how much he needs to save on an annual basis, in a tax-advantaged account, to accumulate $1,100,000 by the first day of retirement. Using the rate of return data from the case narrative, that number is?
4. Tarek is thinking there is no way that he can save that kind of money on his current budget. He thinks he can take more risks with his savings. He asks that you estimate how much he needs to save yearly to meet the $1,100,000 goal if he can earn 12%. What is that number?
5. When you last saw Tarek he was heartbroken because he was worried he would never retire. You just saw him and he had good news to share. He just got engaged to a wealthy widow. She has a nest egg of $350,000. If Tarek were to apply this amount to his savings goal ($1,100,000), how much would he need to save on a yearly basis if he can earn a 7% rate of return?
6. Based on your calculations, do you believe Tarek can meet his goal using his fiancee's $350,000 nest egg, assuming a 7% average rate of return? In order to answer this question it may be important to note that Tarek earns about $73,000 annually before taxes and other payroll deductions; he is also making payments on two cars, a $299,000 mortgage, and college loans for his daughter.
7. Speaking of college, Tarek would like some help calculating the future cost of college for his son Barack. Tarek's son is 8 years old. He will start college at age 18. Tarek would like to fund all of his son's college expenses through a 529 plan or similar investments (e.g., Roth IRA). College costs are currently $13,500; however, experts agree that college expenses are increasing at a rate of 6% annually. Given these facts, how much will one year of college cost when Barack enters college?
8. Tarek now has a good idea of what one year of college will cost in 10 years. Tarek is a nice dad; he wants to make sure that Barack also has spending money for trips, parties, and other fun things. He would like to have enough money to fund $30,000 per year in expenses—this dollar amount is what he wants to have when Barack turns age 18. Assuming that Barack will receive $30,000 in year 1, and then $30,000 adjusted for inflation in the other 3 years, how much will Tarek need to have in his account(s) on the first day of college to fund four (4) years of college? Assume a 6% education inflation rate and a 9% savings rate of return.
9. As you have already noticed, Tarek likes round numbers. Let's make it easy on him and say he will need $120,000 to cover college expenses when Barack turns age 18. If he can earn 9% on his savings, how much does he need in a lump sum payment today to fully cover all future college costs in the future?
10. When Tarek's fiancée learned of the college savings need she dumped him. He is now back at square one. How much will he need to save each year to fully fund Barack's college expenses assuming a 9% return on his investments?