The expenses associated with sending two children through college prevented Vict

Question

The expenses associated with sending two children through college prevented Victor and Maria Hernandez from adding substantially to their investment program. Now that their younger son, Joseph, has completed school and is working full time, they would like to build up their investments quickly. Victor is 47 years old and wants to retire early, perhaps by age 60. In addition to the retirement program at his place of employment, Victor believes that their investment portfolio, currently valued at $120,000, will need to triple to $360,000 by his planned retirement time, in 13 years. He and Maria realize that they will have to sacrifice a lot of current spending to save and invest for retirement.

(b) Victor and Maria think they will need a total of $600,000 for a retirement financial nest egg to supplement his anticipated small pension from teaching. Therefore, they will need to create an additional sum of about $240,000 through new investments. Assuming an annual return of 8 percent, how much do the Hernandezes need to invest each year to reach their goal of $240,000? Use Appendix A-3

(c) If they assume a 6 percent annual return, how much do the Hernandezes need to invest each year to reach their goal of $240,000? Use Appendix A-3

Explanation / Answer

Answer (a) The value of portfolio today = 120000

The amount we want after 13 years is 360000

Then the require return on amount is = 120000(1+r)n= 360000

= (1+r)n = 3 then r = 8.83% (approx)

Answer (b)

The amount required extra after 13 years is 240000

and the return % = 8%

the amount need to invest each year =

let amount invest each year be x

then x * FVAF(8% , 13 ) = 240000

= x * 22.1349 = 240000 then X = $10842.596 is required to invest each year

Answer (c)

The amount required extra after 13 years is 240000

and the return % = 6%

the amount need to invest each year =

let amount invest each year be x

then x * FVAF(6% , 13 ) = 240000

= x * 18.955 = 240000 then X = $12661.522 is required to invest each year

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