Business Question

FIN 210 – CASE STUDY ASSIGNMENT 3INVESTMENTS
Jake is looking forward to retirement and hopes to be able to retire (stop working) when he is 65. In order to
maintain his desired standard of living, Jake estimates that he will need to have $1,200,000 in his retirement
account when he retires at age 65.
1. How much Jake must save each month to reach his retirement goal if he does NOT use the 401(k) and
get the match?
a. Calculate his required monthly savings using a 9.5% rate of return and $0 current balance until
he is 65.
b. Can he afford to invest this amount each month on his current budget?
2. Help Jake recognize the value of his employer match (100% up to 6% of his salary)
a. Take your calculated monthly savings from question #1 and divide it by 1.5. This is the amount
that he must save each month after he receives the free match money for his 401(k).
b. Discuss how much easier his savings goal will be with this free money from his employer.
3. Jake is considering postponing saving for retirement until he has met some of his other financial goals.
He thinks it might be feasible to wait 5 years to begin his retirement savings plan.
a. Recalculate his required monthly savings if he saves for 5 less years.
b. How much more in total dollars must he invest in order to reach his $1.2 million goal as a result
of waiting? (totaled invested = monthly payment * N)
c. Discuss with Jake the value of starting early when investing for long-term goals.
4. You decide to discuss a more complex plan with Jake. You propose that he start investing now by using
the “extended repayment” option on his student loans and use the monthly savings to start his retirement
savings immediately. Analyze this decision for Jake.
a. Calculate how much Jake will have in his retirement account if he invests the difference between
the monthly payments for the 10-year repayment and 20-year repayment plan (that you
calculated in case assignment #1) in his 401(k) for 41 years and 9.5% interest.
b. Compare the value in his retirement account (from #4a) to the total cost of extending the term of
his loans (that you calculated in case assignment #2).
c. Discuss the advantages, risks, and disadvantages of this approach.
5. Jake is feeling confused by all the numbers you have calculated. Help him sort through the numbers.
Should he invest less now, but for a longer time? Or should he wait until his income increases and invest
more later? Or should he change the payment on his student loans and start investing now? Consider
these options in combination with Jake’s other goals that you have analyzed in previous case study
assignments and provide an updated plan for him.