Much of this chapter has dealt with the Steeles goal planning
Much of this chapter has dealt with the Steeles’ goal-planning activities. You may need to refer to some of the chapter material to answer the following questions.
1. Table assumes inflation rates of 6 percent and 3 percent. Granting that these are perhaps the best estimates, nevertheless, rework columns 6 and 8 assuming college costs increase 8 percent annually and that all other costs increase at a 5 percent annual rate. How much must the total required annual savings be, assuming the investment rate remains at 8 percent?
2. Continuing with Table 2.5, don’t change the inflation rates. Now let’s consider the possibility that the Steeles can do better than 8 percent on some of their investments. Specifically, assume they continue to earn 8 percent on investments held for the kids’ education but they can earn 10 percent on investments for the greenhouse and the European vacation, and they can earn 12 percent on their retirement investments. Now determine the required annual savings. (Use Your Financial Review Spreadsheet 2.2 at the author’s Web site.)
3. The Steeles abandon the first savings plan (shown in Table 2.6) because it places too great a strain on their incomes over the next 8 to 13 years. However, by going to the savings plan shown in Table 2.8, aren’t they introducing greater risk into the process, in the sense that one never knows what can happen in the future, and saving greater amounts earlier in their lives provides a cushion in later years if something goes wrong? Discuss this point, addressing both sides of the issue.
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