Jan wants to plan for her daughter’s education. Her daughter, Rachel was born today and will go to college at age 18 for four years. Tuition is currently $23,000 per year, in today’s dollars. Jan anticipates tuition inflation of 6% and believes she can earn a 10% return on her investment.
a. Calculate the NPV of Rachel’s college tuition.
b. Calculate the annual savings needed assuming Jan will be saving until the beginning of her daughter’s first year of college.
c. Calculate the annual savings needed assuming Jan will be saving until the beginning of her daughter’s last year of college.
Part 2:
Jordan, age 46, currently makes $143,000. She expects that inflation will average 2.75 percent for her entire life expectancy. She expects to earn 8.5 percent on her investments and retire at age 65 and live to age 92. She has sent for and received her Social Security benefit statement, which indicated that her Social Security retirement benefit in today’s dollars adjusted for early retirement is $20,000 per year. It is reasonable to subtract the Social Security benefit from today’s needs because it is inflation adjusted.
a. How much money, in today’s dollars, will Jordan need at the beginning of each year during retirement? Assume a SS/payroll tax rate of 7.65%, a savings rate of 12% during her career, and that her $2100 per month mortgage will be paid off on the day she retires. Also remember that social security will contribute $20,000 (in today’s dollars) each year, so I am asking you to subtract that amount.
b. Using the basic annuity method, calculate the amount of capital Jordan will need at retirement. Assume that she wants to receive her annual retirement income at the beginning of each year (annuity due).
c. Calculate the amount Jordan must save monthly, at the end of each month (ordinary annuity), assuming she currently has $25,000 in retirement savings.
d. Calculate the amount of capital Jordan will need at retirement according to the capital preservation method.
e. Calculate the amount of capital Jordan will need at retirement according to the purchasing power preservation model.