Elena Diaz is 57 years old and has been widowed for 13 years. Never remarried she has worked full-time since her husband died%u2014in addition to raising her
two children the youngest of whom is now finishing college. After being forced back to work in her 40s Elena%u2019s first job was in a fast-food restaurant.
Eventually she upgraded her skills sufficiently to obtain a supervisory position in the personnel department of a major corporation where she%u2019s now
earning $58000 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. Actually Elena hasn%u2019t done too badly in that area either. By carefully investing the proceeds from
her husband%u2019s life insurance policy Elena has accumulated the following investment assets:
Money market securities stocks and bonds
IRA and 401(k) plans
Other than the mortgage on her condo the only other debt she has is $7000 in college loans.
Elena would like to retire in 8 years and she recently hired a financial planner to help her come up with an effective retirement program. He has estimated
that for her to live comfortably in retirement she%u2019ll need about $37500 a year (in today%u2019s dollars) in retirement income.
After taking into account the income Elena 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 $15000 a year to meet the balance of her retirement income needs. Assuming a
6% after-tax return on her investments how big a nest egg will Elena need to earn that kind of income?
Suppose she can invest the money market securities stocks and bonds (the $72600) at 5% after taxes and can invest the $47400 accumulated in her
tax-sheltered IRA and 401(k) at 7%. How much will Elena%u2019s investment assets be worth in 8 years when she retires?
Elena%u2019s employer matches her 401(k) contributions dollar for dollar up to a maximum of $3000 a year. If she continues to put $3000 a year into
that program how much more will she have in 8 years given a 9% rate of return?
Assuming she has not done any estate planning what would you recommend she do immediately? Explain.
What would you advise Elena about her ability to retire in 8 years as she hopes to?