# Case approach to financial planning quantitative/analytical mini-case

1. Marybeth and Anneal Yao are beginning to contemplate retirement. They are each forty-five years of age and have saved a total of \$500,000 for retirement. Marybeth and Anneal realize that they have not saved sufficiently to be able to retire early, fully retire without some part-time employment, or replace 100 percent of current pre-retirement income. As such, they are willing to explore different approaches to reach retirement.

Marybeth and Anneal have a combined annual income of \$125,000. They believe their salaries will keep pace with inflation at 4 percent per year. They are also comfortable assuming that the effective annual rate of return on their retirement assets will be 9.0 percent before retirement and 6.5 percent after retirement. For now, Marybeth wants to keep the planning simple, projecting that they will both die in exactly forty years and that their retirement assets will be depleted with the exception of \$100,000 to cover funeral and burial costs. Lastly, they do not want to continue saving after they retire (either partly or fully).

As their financial planner, provide some assistance in calculating the amount of retirement assets needed on the first day of retirement, based on the two options listed below. Considering the information presented in the case, which outcome requires the lowest monthly (end-of-month) contribution if they also require that their retirement annuity grow by 4.0 percent per year to keep pace with inflation? (Ignore the effects of income taxes and Social Security on the answer.)

a.To retire at age fifty-five with an income replacement ratio of 60 percent.

b.To retire at age fifty-five with an income replacement ratio of 100 percent but work part-time for an additional ten years to offset half the projected annual need for those ten years. (In other words, Marybeth and Anneal will have a 50 percent replacement ratio for 10 years and a 100 percent replacement ratio thereafter.)

c.To retire at age sixty-five with an income replacement ratio of 100 percent.

3. Lyle and Melissa Murray plan to retire when Lyle turns age sixty-five, even though his normal retirement age is age sixty-seven. Lyle has worked at the same firm for over thirty years. Melissa has worked only occasional temporary jobs over her lifetime. The Murrays have a few questions about Lyle’s defined benefit pension benefit and expected Social Security benefits. Use the following information to answer their questions:

a.What are the three distribution methods available to Annette?

b.Which method should she choose to maximize tax deferral? Based on the appropriate life expectancy table, how much will her first required distribution be? When will this distribution happen?

c.Which method should she choose to maximize the distribution? Based on the appropriate life expectancy table, how much will her first required distribution be? When would this distribution happen?

d.Which alternative would not have been available had her husband begun his required distributions?

e.If Annette had been younger than age fifty-nine, which alternative would have allowed her to take distributions without incurring a tax penalty?

2. Lyle and Melissa Murray plan to retire when Lyle turns age sixty-five, even though his normal retirement age is age sixty-seven. Lyle has worked at the same firm for over thirty years. Melissa has worked only occasional temporary jobs over her lifetime. The Murrays have a few questions about Lyle’s defined benefit pension benefit and expected Social Security benefits. Use the following information to answer their questions:

•Lyle must choose from the following four defined benefit plan distribution options:

•\$3,000 for life with no survivor benefit

•\$2,700 for life with a 50 percent survivor benefit

•\$2,350 for life with a 67 percent survivor benefit

•\$2,000 for life with a 100 percent survivor benefit

a.Assuming (a) Lyle lives ten years after retiring, (b) Melissa lives an additional ten years beyond Lyle’s passing, and (c) the pension has no cost of living adjustment, which of the four alternatives should they choose in order to maximize their combined lifetime benefit?

b.What benefit alternative should they choose if Lyle lives another twenty years beyond retirement and Melissa lives an additional ten years beyond that?

c.If Lyle’s Social Security retirement benefit at age sixty-seven is \$2,300 per month, how much will they receive in yearly benefits if they both claim benefits when Lyle turns age sixty-five?

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