Form a group of TWO members and select a coordinator for the group. Take the average of
Question:
Form a group of TWO members and select a coordinator for the group. Take the average of the last digits of group members’ 8-digit UMIDs and use the average as the income scalar in the analysis. For example, if the two UMIDs’ last digits are, respectively, 0 and 8, then the income scalar for the group will be (0+8)/2=4. If the group’s income scalar is 4 or less, add 5 to the calculated value and use it as the income scalar in your analysis. Assume a 360-day year and 30- day month in your analysis. Your clients (a married couple), both just turned 40, have diligently run their family business for a decade and have paid off all of their debts. Recently, their business has grown into a stable stage that generates a growing income stream for the family. From your initial consultation with your clients, you learn that they plan to retire on the day after they turn 62.
Their family income is $7,800*income scalar at the end of this quarter, and they expect their family income will grow at a steady rate of 1.0% every quarter until they retire. To prepare for retirement, your clients deposit 18% of their quarterly income in a tax-deferred SEP IRA account that generates an annual rate of return of 12%, compounded daily.
Q1. Determine the cash flows pattern of the quarterly contributions to the SEP-IRA account; and calculate and explain precisely your choice of interest rate, i.e., EAR/EPR/PER (select the correct choice), used in the analysis. Also, calculate the SEP IRA account balance upon their retirement. Verify your work on the SEP IRA account balance with the formula approach! In addition to their retirement savings, your clients contribute 7% of their quarterly income into a taxable brokerage account that generates an annual after-tax return of 9%, compounded daily, to cover their financial needs before their retirement. Starting this year, your clients commit to help finance their 10-year old daughter’s college education by transferring $10,000 from the brokerage account to a 529 Plan account at the end of each year. Your clients will transfer fund annually to the 529 Plan account until their daughter finishes college. The 529 Plan account is expected to generate an annual rate of return of 7.2%, compounded daily. Besides, your clients plan to celebrate their 50-year birthday anniversary with a European tour that will cost $30,000, and their 60-year birthday anniversary with an around-the-world cruise for a cost of $95,000.
They will finance these trips with their savings in the brokerage account. Any remaining balance in their brokerage account will supplement the SEP IRA account for financing their retirement.
Q2. Determine the cash flows pattern of the quarterly contributions to the brokerage account; and calculate and explain precisely your choice of interest rate, i.e., EAR/EPR/PER (select the correct choice), used in the analysis. Also, calculate the brokerage account balance upon their retirement.
Q3. Determine the cash flows pattern of the annual fund transfers to the 529 Plan account; and calculate and explain precisely your choice of interest rate, i.e., EAR/EPR/PER (select the correct choice), used in the analysis. Also, calculate the 529 Plan account balance at the time their daughter starts college. Verify your work on the 529 Plan account balance with either the formula or the financial calculator approach! Today, annual college expenses are running at $35,000, and are expected to grow at an annual rate of 3%. Their daughter, who just turned 10, will enter college when she turns 18, and complete her undergraduate study in FIVE years. Your clients expect their daughter to be responsible for 35% of her college expenses by participating in the Federal Work-Study Program. All annual college expenses will be due at the beginning of each year. Your clients will tap into the 529 Plan account for paying their share of their daughter’s college expenses.
Q4. Will there be sufficient fund in the 529 Plan account to finance their daughter’s college expenses? If not, when will the 529 Plan account run out of money? Support your answer numerically by showing the annual balances of the 529 Plan account through their daughter’s college years. If there is a positive balance in the 529 Plan account at their daughter’s college graduation, your clients will partially support her graduate study with money left in the 529 Plan account. Their daughter plans to work for FOUR years before returning to graduate school for an MBA. Today, annual expenses for a competitive full-time 2-year MBA program are running at $50,000, and are expected to grow at an annual rate of 4%. Your clients will want to offer assistance to their daughter’s pursuit of graduate education with the available fund (if any) in the 529 Plan account by subsidizing one-fifth of the annual expenses during her MBA study.
Q5. Will there be sufficient funds in the 529 Plan account for subsidizing their daughter’s MBA program expenses?
If not, when will the 529 Plan account run out of money? Support your answer numerically by showing the annual balances of the 529 Plan account through their daughter’s MBA study. Upon their retirement, your clients will roll over the entire balance of their SEP IRA account into the Roth IRA account by paying a 25% tax rate on the balance upon conversion. Note that the balance of the brokerage account is on an after-tax basis and hence no further adjustment is needed.
Q6. How large will be the after-tax nest egg upon the retirement of your clients? In other words, calculate the combined balance of the Roth IRA account and their brokerage account as they start enjoying their retirement. Also, offer THREE different recommendations to your clients that could increase their nest egg. After their retirement, your clients put their entire nest egg into a conservative account that is expected to generate an annual rate of return of 6%, compounded monthly. In the first month of their retirement, the monthly expenses are expected to be 16% of their quarterly income right before retirement. And the monthly retirement expenses are subjected to monthly inflation at an annual rate of 2.7%. Your clients need to withdraw from this conservative account at the beginning of each month in order to meet the monthly expenses during their retirement horizon of 25 years.
Q7a. Determine the cash flows pattern of the monthly withdrawals from the conservative account; and calculate and explain precisely your choice of interest rate, i.e., EAR/EPR/PER (select the correct choice), used in the analysis. Will your clients be able to leave any inheritance to their daughter at the end of their retirement horizon? If so, calculate the size of the inheritance. If your clients could not leave any inheritance to their daughter at the end of the retirement horizon, at what age will they run out of money during their retirement? Support your answer numerically. Verify your work on the retirement needs and hence the inheritance with the formula approach!
Q7b. In order to help their daughter manage her finances, your clients instruct you to place the inheritance, i.e., the balance of the conservative account, in a trust fund account at the end of their retirement horizon. The trust fund, which generates an annual rate of return of 7.8%, compounded monthly, distributes fixed semi-annual payments to their daughter and her offspring forever.
Determine the cash flows pattern of the semi-annual distributions from the trust fund account; and calculate and explain precisely your choice of interest rate, i.e., EAR/EPR/PER (select the correct choice), used in the analysis. Also, calculate the amount of the semi-annual distribution. Verify your work on the trust fund distributions with the formula approach, and offer THREE different recommendations (other than those you use in answering Q6 that lead to a larger nest egg) to your clients that could increase their likelihood of leaving an inheritance.
Q7c. Alternatively, your clients decide to gift their daughter annually during their retirement instead of leaving an inheritance at the end of their retirement horizon. Calculate the maximum (fixed) amount of annual gift, and explain precisely your choice of interest rate, i.e., EAR/EPR/PER (select the correct choice), used in the analysis. Verify your work on the annual gifts with the formula or financial calculator approach!
Business Communication
ISBN: 978-1439080153
8th edition
Authors: Buddy Krizan, Patricia Merrier, Joyce P. Logan, Karen Schneiter Williams