Questions



1. Assume that Michelle is self-employed. What are her retirement plan options?


2. By using the annuity approach, calculate the capital needed at retirement (age 67) for the Williamses. Assume a 9% after-tax rate of return. Based on the calculation on Michael’s salary only.


3. By using the capital preservation approach, calculate the capital needed at retirement for the Williamses.

4. By using the purchasing power preservation approach, calculate the capital needed at retirement for the Williamses.




5. Explain the key differences between the three approaches in Questions 2-4.


6. Using the capital you computed in Question 2 to determine whether the Williamses will be able to retire at age 67 with their current annual savings. For current annual savings, use Michael’s Section 401(k) plan contribution plus the employer’s match and assume that Michelle saves all that she currently earns on an annual basis. Assume that all investment assets (regardless of how they are currently invested) will earn a 9% after-tax rate of return. Consider the checking account, market money account, and coin collection as non-retirement assets.



7. What changes, if any, would you recommend to the Williamses regarding their retirement planning?


8. If Michael and Michelle include the receipt of Social Security benefits in their retirement planning, could they retire at age 67 without increasing their annual savings? Assume that at age 67 (in today’s dollars) Michael’s Social Security benefit would be $29,820 and Michelle’s would be $14,910. Use Michael’s salary only.




9. If the Williamses choose to rely on Social Security benefits in their retirement planning, how much earlier than 67 can they retire? (Assume all other facts as given in Question 8)


10. Describe a Keogh (HR-10) plan and discuss the advantages and disadvantages in adopting this type of plan.


11. Describe a SEP IRA and discuss the advantages and disadvantages of adopting this type of plan.


12. Describe a SIMPLE IRA and discuss the advantages and disadvantages of adopting this type of plan.


13. Describe a SIMPLE 401(k) and discuss the advantages and disadvantages of adopting this type of plan.

14. Of the four plans discussed, which is the best fit for Michelle’s new business?




15. Other than child care costs and unreimbursed medical expenses, what expenses can Michael pay for with pre-tax dollars through his FSA?