Question

Felicia Garza is 57 years old. She has worked full-time since her husband died 13 years ago—in addition to raising her two children, the youngest of whom is now finishing college. After going back to work in her 40s, Felicia obtained a supervisory position in the personnel department of a major corporation, where she’s now earning $85,000 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. Felicia has accumulated the following investment assets:

Money market securities, stocks, and bonds                           $147,000

IRA and 401(k) plans                                                                $372,000

Other than the mortgage on her condo, the only other debt she has is $7,000 in college loans.

Felicia would like to retire in 8 years, and she recently hired a financial planner to help her come up with an effective retirement program. Her planner has estimated that, for her to live comfortably in retirement, she’ll need about $68,000 a year (in today’s dollars) in retirement income.

Questions:

1.      After taking into account the income that Felicia 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 $25,000 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 Felicia need to earn that kind of income?

2.      Suppose she can invest the money market securities, stocks, and bonds (the $147,000) at 5 percent after taxes and can invest the $372,000 accumulated in her tax-sheltered IRA and 401(k) at 7 percent. How much will Felicia’s investment assets be worth in 8 years, when she retires?  

3.      If Felicia continues to put $10,000 a year into her 401(k) program, how much more will she have in 8 years, given a 7 percent rate of return? 

4.      What would you advise Felicia about her ability to retire in 8 years, as she hopes to?