Elena Diaz is 57 years old and has been widowed for 13 years. Never remarried, she has worked full-time since her husband died—in addition to raising her two children, the youngest of whom is now finishing college. After being forced back to work in her 40s, Elena’s first job was in a fast-food restaurant. Eventually, she upgraded her skills sufficiently to obtain a supervisory position in the personnel department of a major corporation, where she’s now earning $58,000 a year.
Although her financial focus for the past 13 years has, of necessity, been on meeting living expenses and getting her kids through college, she feels that now she can turn her attention to her retirement needs. Actually, Elena hasn’t done too badly in that area, either. By carefully investing the proceeds from her husband’s life insurance policy, Elena has accumulated the following investment assets:
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Money market securities, stocks, and bonds
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$72,600
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IRA and 401(k) plans
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$47,400
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Other than the mortgage on her condo, the only other debt she has is $7,000 in college loans.
Elena would like to retire in 8 years, and she recently hired a financial planner to help her come up with an effective retirement program. He has estimated that, for her to live comfortably in retirement, she’ll need about $37,500 a year (in today’s dollars) in retirement income.
a. After taking into account the income Elena will receive from Social Security and her company-sponsored pension plan, the financial planner has estimated that her investment assets will need to provide her with about $15,000 a year to meet the balance of her retirement income needs. Assuming a 6% after-tax return on her investments, how big a nest egg will Elena need to earn that kind of income?
b. Suppose she can invest the money market securities, stocks, and bonds (the $72,600) at 5% after taxes and can invest the $47,400 accumulated in her tax-sheltered IRA and 401(k) at 7%. How much will Elena’s investment assets be worth in 8 years, when she retires?
The Money Market Securities, stock and bonds will total up to be $92,129.40.
c. Elena’s employer matches her 401(k) contributions dollar for dollar, up to a maximum of $3,000 a year. If she continues to put $3,000 a year into that program, how much more will she have in 8 years, given a 9% rate of return? [Do not factor in the amount she already has in her 401k.]
d. Assuming she has not done any estate planning, what would you recommend she do immediately? Explain.