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Financial Planning Retirement

Three years ago, you graduated college and started your new job making $40,000 per year. Following the advice of people like Dave Ramsey and your college personal finance professor, you built a budget and have followed well to the point you have saved $15,000 in a personal savings account. In addition, you have married the love of your life and both of you want to start a family with a goal of 2 kids and 2 dogs. You recognized that you need to purchase a house as it would be a good investment in the Naperville IL area which is an easy commute to your downtown Chicago place of work. In the 3 years at your job, you have had one promotion and 3 raises where you now make $65,000 a year and your career a Acme International is very promising. Along with the raises your 401K has been matched up to 6% of your income and you have contributed that amount to meet match each year. The match is in the form of Acme Stock which has performed we over the 3 years as well. All total, your 401K stands at $19,000. You still have your emergency saving fund of $15,000, not quite the 3 months of savings but should do. Your original budget is as follows:

Of course, now you are making $65,000 which that surplus has helped with the savings and allowed you pay cash for a new car, well almost new, as 2017 Ford F-150 with only 40,000 miles. Over the weekend, you need to update your budget that will allow you to have a plan where you married, buy a 3 bedroom home that will allow a comfortable living style with the love of your life. In addition, you need also begin thinking about retirement as well given that is what the 401K is for. Thus, you need to project this new budget up to and beyond retirement. The following are changes to the original budget and projected impact of a new home and life after marriage.

New Salary of $65,000 with 6% continue dedicated to the 401K which is matched by your company with their stock. All costs are the same except the Car Payment which is now Zero. Your emergency savings account now stands at $15,000. You have set the date for marriage which is 6 months away. Between then and now you want to purchase a home and project a financial plan through retirement using the following assumptions:

Current:

Your making $65,000 today with 6% being taken out into your 401k and the company matches that 6% with their stock. Your side of the investment is put into 5 mutual funds that together represent the market earning about 10% per year.

You desire a 3-bedroom home with 2 living areas for you and your partner to live in. Approximately 3,200 square feet. Housing prices are around $100 per square foot with interest rates at between 2.5 and 3 Percent. You should assume a price of $320,000 and a 30 year loan at 3%. In addition Property Taxes and Insurance would add $250 to your monthly mortgage payment.

You have no car payment and plan to pay cash in the future as this gets you the better deal. You will probably be replacing your car in about 5 years and every 5 years after that. In addition you partner will have a car to replace as well so every 3 years you should plan on buying one car. Assume the $40,000 price for the new car.

Groceries times 2 will be a good estimate. While Utilities will double as well since you will be heating and cooling an area that is twice as big as your current space. Other costs will remain the same with Rent being replaced by the Mortgage payment.

Retirement:

You and your partner can expect to live to 90 Years old as both your parents did the same. Today you are 42 years from retirement at 65 years old.

After 3 years, your 401K stands at $19,000 and your part of the investment is in 4 mutual funds that represent large company stocks paying solid dividends (they call it the Dogs of the Dow mutual fund), a mutual fund represents mostly international companies, a mutual fund where medium sized companies are used as this is considered a growth fund and slightly riskier. Finally, a mutual fund dedicated to large company bonds trying to replicate the safe but lower interest rate associated to bonds. All together these funds have earned 10% per year. Your emergency savings earns 2% per year but you have easy access to this case. Your plan is to keep this allocation, but you also would like to have a Edward Jones account established where you can fund with excess cash flow if any. Edward Jones track record is to earn about 10% or higher and have very low fees (less than 1%) per transaction.

In addition to Medicare you should plan on funding your own health insurance plan which at the time of retirement it is anybodys guess what that will costs but assume it is $500 per month for 2 people at todays dollar (not adjusted for inflation).

Inflation has been low but could be on the rise soon. Over the past 10 years inflation as measured by common items purchased every day, was 1.5%. This excludes gasoline which is up and down with the oil price. It is safe to assume cost of every day goods will grow at 1.5% until retirement.

Your desire is to have a retirement account that can fund 35 years of living at the same costs you will have at retirement. You would replace your mortgage with travel costs at the time of retirement and through retirement. If you simply want to stay in your back yard and garden then that would be fine as well but plan on the expensive version of retirement.

You estimate that social security will pay around $3,500 per month for the 35+ years of your retirement.

Your assignment is to build a budget for your upcoming status change then forecast these costs at the time of retirement (i.e. adjust for inflation and other factors). Assume you need enough funds at retirement to live on for 35 years. Social Security at the time of your retirement should be around $3,500 per month, which is the government paying you back what you put into Social Security for your working years (~ 6.5% of your income).

Category Month Annual Total Income 3,333 $ 39,996 Taxes and Other Withholdings $ 843 $ 10,116 Rent 600 $ 7,200 Car Payment 250 $ 3,000 Gas and Car Maintenance 55 $ 657 Car Insurance 100 $ 1,200 Groceries 300 $ 3,600 Utilities and other Costs 400 $ 4,800 Miscellaneous Expenditures 150 $ 1,800 Savings 435 $ 5,220 Other Costs 200 $ 2,400 Surplus/(Deficit) $ O $ 3 Table 1 Category Original 3 yrs later Total Income $ 40,000 $ $ 10,116 $ Taxes and Other Withholdings Rent / Mortgage Car Payment 65,000 16,439 7,200 which mortgage $ 7,200 $ $ 3,000 $ Gas and Car Maintenance 657 $ 1,314 2,400 Assume 2 cars Car Insurance 1,200 $ Groceries $ 3,600 Utilities and other Costs $ 4,800 Miscellaneous Expenditures 1,800 Savings $ 5,220 2,400 Other Costs Surplus / (Deficit) $ 7 $ 37,648 Table 1 Current Budget +42 Years Category Total Income $ 65,000 $ 121,475 $ 16,439 $ 30,721 $ 7,200 $ 13,456 $ $ $ 1,314 $ 2,456 $ 2,400 $ 4,485 Taxes and Other Withholdings Rent / Mortgage / Travel Car Payment Gas and Car Maintenance Car Insurance Supplemental Health $ Insurance Groceries Utilities and other Costs Miscellaneous Expenditures Savings Other Costs $ $ $ $ $ $ $ $ $ $ $ Surplus / (Deficit) $ 37,648 $ 70,357 If salary increases beyond inflation then that creates surplus to reviewed at that time. Table 1 Annual Pmt N Future Value Current Balance Expected Return 401K $ Edward Jones Savings $ $ 0.04 $ 35 Average Annual Annuity from Life Savings Given Maximum Savings Assume only 401K $ 0.04 $ 35 Minimum Savings needed to Fund Retirement needed Yellow cells represent items to input from the case. Expected Return represents the interest rate and Nis number of years. Table 1 Price (PV) Interest Rate Months Monthly Payment Monthly Taxes Total and Insurance Monthly Pmt Payment 30 Yr Mortgage #NUM! $250 #NUM! 15 Yr Mortgage $250 $ 250 How much do you save with the 15 years loan over the 30 year loan? #NUM! If you can afford the 15 year plan then go for it! Category Month Annual Total Income 3,333 $ 39,996 Taxes and Other Withholdings $ 843 $ 10,116 Rent 600 $ 7,200 Car Payment 250 $ 3,000 Gas and Car Maintenance 55 $ 657 Car Insurance 100 $ 1,200 Groceries 300 $ 3,600 Utilities and other Costs 400 $ 4,800 Miscellaneous Expenditures 150 $ 1,800 Savings 435 $ 5,220 Other Costs 200 $ 2,400 Surplus/(Deficit) $ O $ 3 Table 1 Category Original 3 yrs later Total Income $ 40,000 $ $ 10,116 $ Taxes and Other Withholdings Rent / Mortgage Car Payment 65,000 16,439 7,200 which mortgage $ 7,200 $ $ 3,000 $ Gas and Car Maintenance 657 $ 1,314 2,400 Assume 2 cars Car Insurance 1,200 $ Groceries $ 3,600 Utilities and other Costs $ 4,800 Miscellaneous Expenditures 1,800 Savings $ 5,220 2,400 Other Costs Surplus / (Deficit) $ 7 $ 37,648 Table 1 Current Budget +42 Years Category Total Income $ 65,000 $ 121,475 $ 16,439 $ 30,721 $ 7,200 $ 13,456 $ $ $ 1,314 $ 2,456 $ 2,400 $ 4,485 Taxes and Other Withholdings Rent / Mortgage / Travel Car Payment Gas and Car Maintenance Car Insurance Supplemental Health $ Insurance Groceries Utilities and other Costs Miscellaneous Expenditures Savings Other Costs $ $ $ $ $ $ $ $ $ $ $ Surplus / (Deficit) $ 37,648 $ 70,357 If salary increases beyond inflation then that creates surplus to reviewed at that time. Table 1 Annual Pmt N Future Value Current Balance Expected Return 401K $ Edward Jones Savings $ $ 0.04 $ 35 Average Annual Annuity from Life Savings Given Maximum Savings Assume only 401K $ 0.04 $ 35 Minimum Savings needed to Fund Retirement needed Yellow cells represent items to input from the case. Expected Return represents the interest rate and Nis number of years. Table 1 Price (PV) Interest Rate Months Monthly Payment Monthly Taxes Total and Insurance Monthly Pmt Payment 30 Yr Mortgage #NUM! $250 #NUM! 15 Yr Mortgage $250 $ 250 How much do you save with the 15 years loan over the 30 year loan? #NUM! If you can afford the 15 year plan then go for it

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