Perry's Financial Goals

Perry Edwards is 25 years old.  He and his wife Anita have two children, Shane and Lisa, ages 1 and 3 respectively.  Perry wants to retire in 40 years and refurbish old cars.  He would like a nice retirement home with some land on a peaceful lake in the mountains of Pennsylvania.  Perry believes that to purchase a home and lot in 40 years would cost $200,000 in today's prices.  In forty years Perry also believes he and his wife can live comfortably on $35,000 a year in today's dollar terms. 

Realizing that retirement is only 40 years away, and that he still had two children to raise and put through college, Perry thought he had better start saving for his retirement dreams.  Also, Lisa is only 15 years away from college, and before Lisa finishes, Shane will be ready for school in 17 years.  Currently Perry has $5,000 in an emergency money market account earning 4.0% interest compounded daily.  His desire is to never have to use those emergency funds and that they will become a part of his estate.   He also owns his own home that has a market value of $100,000 and a mortgage of $90,000.  The 8.0% mortgage has 28 years remaining and his monthly payments are $672 for principal and interest alone.

Perry's annual salary is $40,000.  His employer puts an additional $2,000into a 401(k) retirement plan.   This retirement amount currently equals $4,000 and it is invested in a stock mutual fund, which has been earning an annual rate of return of 10.0%.  With the current level of the federal debt, Perry is not counting on receiving any funds from social security at his retirement.  

With all of the concern about college tuition increasing over the years, Perry believes that the children will have to go to the local junior college for their first two years and then a state school for their last two years.  The cost to attend the local junior college is $3,000 per year today, and the cost to attend a state school is $10,000 per year today.

Inflation will have a great impact on Perry's future retirement and college plans for his children.  Based on what he has read and heard on the news, Perry believes that inflation will average 4.0% per year for the next 40 years; however, the cost of a college education will increase by 7.0% per year for the junior college and state school.  Also, with the desirability of vacation homes, the house and property in Pennsylvania will probably increase at a rate of 6.0% per year, while his current home will increase in value at a rate of 5.0% per year.  Perry hopes that his annual salary will increase by at least 3.0% per year. 

Note:  For each of the computations completed below, answers can be stated to the nearest dollar.

Required

1. Based on the inflation rates, compute the value of the retirement home and Perry's current home when he wants to retire in 40 years.

2. Based on the inflation rates, compute the cost of college for Shane and Lisa when they will be going to school.

3. Based on the inflation rates, compute the amount of money that Perry and Anita will need to live on during their first year of retirement in 40 years

4. If Perry receives his expected annual raises, what will be his salary at retirement?

5. If the emergency money market funds are not used, what will be the value of the funds at retirement?

6. Assuming that Perry's employer continues to put $2,000 every year into a 401(k) retirement and the account remains in the stock mutual fund, how much will be in the retirement account in 40 years?

7. Assuming that Perry has no money set aside for his children's college at this time, approximately how much will he have to save per month for Shane's education, for Lisa's education, if he earns 5.0% on the invested funds.  (Assume that he wants to have $85,000 available for Lisa and $95,000 available for Shane at the start of each child's college education to pay for the entire four years.)

8. Assuming that Perry wants enough income for 25 years of retirement and the rate of inflation will remain at 4.0% per year, how much will Perry and Anita need to live on for the 25 years?  (Hint: Use $170,000 for your payment variable.)

9. How much will Perry need to save per month to pay for Anita and his retirement income for 25 years assuming that Perry can earn 8.0% per year on the invested funds.  (Assume he will need to make the monthly savings every month for the next 65 years.) (Hint: Use $7,000,000 as your future value variable.)

10. Perry hopes that the money from his retirement funds plus what he makes on the sale of his current home will be enough to allow him to buy the retirement home.  Can this goal be realized?

11. Based on the level of savings that Perry needs to achieve over the next 20 years, discuss the feasibility of his achieving his objectives for his children's education and his retirement.

12. Discuss ways in which Perry can increase the probability of achieving his desired education and retirement goals.  What role does risk play in the investment process?