Personal Financial Planning 13th Edition by Lawrence Gitman,Michael Joehnk,Randy Billingsley

Exercise 18

Sophia Ramirez is 57 years old and has been widowed for 13 years. Never remarried, she has worked full-time since her husband died-in addition to raising her two children, the youngest of whom is now finishing college. After being forced to go back to work in her 40s, Sophia's first job was in a fast-food restaurant. Eventually, she upgraded her skills sufficiently to obtain a supervisory position in the personnel department of a major corporation, where she's now earning $58,000 a year. Although her financial focus for the past 13 years has, of necessity, been on meeting living expenses and getting her kids through college, she feels that now she can turn her attention to her retirement needs. Actually, Sophia hasn't done too badly in that area, either. By carefully investing the proceeds from her husband's life insurance policy, Sophia has accumulated the following investment assets:

Other than the mortgage on her condo, the only other debt she has is $7,000 in college loans.
Sophia would like to retire in eight years, and she recently hired a financial planner to help her come up with an effective retirement program. He has estimated that, for her to live comfortably in retirement, she'll need about $37,500 a year (in today's dollars) in retirement income.
Critical Thinking Questions
1. After taking into account the income that Sophia will receive from Social Security and her company- sponsored pension plan, the financial planner has estimated that her investment assets will need to provide her with about $15,000 a year to meet the balance of her retirement income needs. Assuming a 6 percent after-tax return on her investments, how big a nest egg will Sophia need to earn that kind of income
2. Suppose she can invest the money market securities, stocks, and bonds (the $72,600) at 5 percent after taxes and can invest the $47,400 accumulated in her tax-sheltered IRA and 401(k) at 7 percent. How much will Sophia's investment assets be worth in eight years, when she retires
3. Sophia's employer matches her 401(k) contributions dollar for dollar, up to a maximum of $3,000 a year. If she continues to put $3,000 a year into that program, how much more will she have in eight years, given a 9 percent rate of return
4. What would you advise Sophia about her ability to retire in eight years, as she hopes to