Jerry and his wife, Terry, are considering a major career change. Jerry is think
ID: 1171753 • Letter: J
Question
Jerry and his wife, Terry, are considering a major career change. Jerry is thinking about quitting IBM for a job with the U.S. Forest Service in Colorado. Terry does not work. Before leaving his high-paying job at IBM, Jerry has decided to analyze his family’s financial situation.
Jerry’s assets (today):
Total of $256,000 invested in the stock market, forecast to continue earning 11% as long as it is invested.
Jerry’s future needs (timeline):
In 10 years: Two kids’ college educations (current cost is $80,000 each…education inflation rate is 7.8% annually and is forecast to remain at that level for the next 10 years).
In 15 years: Two kids’ weddings (current cost is $50,000 each…costs are expected to rise by 3% annually).
In 20 years: Retirement (Jerry wants the equivalent of $5,000 per month today. Inflation is expected to be 3% annually UNTIL retirement (ignore inflation AFTER retirement). Jerry wants the EQUIVALENT of $5,000 per month to continue for 30 years (at which time, he is planning to die or move in with his children)).
The questions you need to answer:
1—Does Jerry have enough saved to fund all of his future needs?
2—If Jerry only earns 8% on his investments, how much will he need to save per month (starting now) to be able to retire (assuming everything else stays the same)?
Explanation / Answer
No Jerry does not saves enough to fund all of his future needs. The calculation of the same are shown below-
It is deemed that the stock market gives return of 11% per year are reinvested in the same year and assume that jerry leaves the job.
Total return from market after 20 years = $256000(1+0.11)20 = $20,63,951.75
Require college fees for two children after 10 years = $800000*2(1+0.0.78)10 = $3,39,0842.3
Require amount for marriage after 15 Year for 2 children = $750000*2(1+0.03)15 = $1,55,79677.5
Require amount monthly for 30 years = $1800000(1+0.03)30 = $43,69,072.45
Required Amount = $20,63,951.75-$3,39,0842.3-$1,55,79677.5-$43,69,072.45
So, it is benecificial for the jerry does not leave his high pay job.
2. If Jerry earns 8% they are not save any amount if they are not save in 11% return so it is not possible for jerry to save in 8% in return.
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