Answered You can hire a professional tutor to get the answer.
1 The Eriksons Struggle with Two Investment Goals Like many married couples, Eric and Stephanie Erickson are trying their best to save for two...
11.1 The Eriksons Struggle with Two Investment Goals
Like many married couples, Eric and Stephanie Erickson are trying their best to save for two important investment objectives: (1) an education fund to put their two children through college; and (2) a retirement nest egg for themselves.
They want to have set aside $40,000 per child by the time each one starts college. Given that their children are now 10 and 12 years old, Eric and Stephanie have 6 years remaining for one child and 8 for the other. As far as their retirement plans are concerned, the Eriksons both hope to retire in 20 years when they reach age 65. Both Eric and Stephanie work, and together they currently earn about $90,000 a year. Six years ago, the Eriksons started a college fund by investing $6,000 a year in bank CDs. That fund is now worth $45,000—enough to put one child through an in-state college. They also have $50,000 that they received from an inheritance invested in several mutual funds and another$20,000 in a tax-sheltered retirement account. Eric and Stephanie feel they’ll easily be able to continue putting away $6,000 a year for the next 20 years. In fact, Stephanie thinks they’ll be able to put away even more, particularly after the children are out of school. The Eriksons are fairly conservative investors and feel they can probably earn about 6% on their money. (Ignore taxes for the purpose of this exercise.)
1. Use Worksheet 11.1 to determine whether the Eriksons have enough money right now to meet their children’s educational needs. That is, will the $45,000 they’ve accumulated so far be enough to put their children through school, given they can invest their money at 6%? Remember, they want to have $40,000 set aside for each child by the time each one starts college.
2. Regarding their retirement nest egg, assume that no additions are made to either the $50,000 they now have in mutual funds or to the $20,000 in the retirement account. How much would these investments be worth in 20 years, given that they can earn 6%?
3. Now, if the Eriksons can invest $6,000 a year for the next 20 years and apply all of that to their retirement nest egg, how much would they be able to accumulate given their 6% rate of return?
4. How do you think the Eriksons are doing with regard to meeting their twin investment objectives? Explain.
