Scribd
Upload
88 views2 pages

Case Study #4

Ryan is a 27-year-old man who graduated 5 years ago and earns $70,000 annually as a grocery store manager. His company offers a retirement savings plan that Ryan did not take advantage of, instead spending money on luxuries. Now planning a wedding and home purchase, Ryan realizes he needs to start saving. The case study examines how much money Ryan could have saved in retirement over the past 5 years if he had contributed maximally, as well as calculating how much he needs to save going forward for various financial goals. The key lesson is that starting retirement savings early makes a significant difference due to compound interest.

Uploaded by

Jenny Ojoylan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
88 views2 pages

Case Study #4

Ryan is a 27-year-old man who graduated 5 years ago and earns $70,000 annually as a grocery store manager. His company offers a retirement savings plan that Ryan did not take advantage of, instead spending money on luxuries. Now planning a wedding and home purchase, Ryan realizes he needs to start saving. The case study examines how much money Ryan could have saved in retirement over the past 5 years if he had contributed maximally, as well as calculating how much he needs to save going forward for various financial goals. The key lesson is that starting retirement savings early makes a significant difference due to compound interest.

Uploaded by

Jenny Ojoylan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Case Study #4: It’s Better Late Than Never!

“Boy, this is all so confusing,” said Ryan as he stared at the papers on his desk. If only I had
taken the advice of my finance instructor, I would not be in such a predicament today.” Ryan Daniels,
aged 27, graduated five years ago with a degree in food marketing and is currently employed as a middle-
level manager for a fairly successful grocery chain. His current annual salary of $70,000 has increased at
an average rate of 5 percent per year and is projected to increase at least at that rate for the foreseeable
future. The firm has had a voluntary retirement savings program in place, whereby employees are allowed
to contribute up to 11% of their gross annual salary (up to a maximum of $12,000 per year) and the
company matches every dollar that the employee contributes. Unfortunately, like many other young
people who start out in their first “real” job, Ryan has not yet taken advantage of the retirement savings
program. He opted instead to buy a fancy car, rent an expensive apartment, and consume most of his
income.

However, with wedding plans on the horizon, Ryan has finally come to the realization that he had
better start putting away some money for the future. His fiancée, Amber, of course, had a lot to do with
giving him this reality check. Amber reminded Ryan that besides retirement, there were various other
large expenses that would be forthcoming and that it would be wise for him to design a comprehensive
savings plan, keeping in mind the various cost estimates and timelines involved.

Ryan figures that the two largest expenses down the road would be those related to the wedding
and down payment on a house. He estimates that the wedding, which will take place in twelve months,
should cost about $15,000 in today’s dollars. Furthermore, he plans to move into a $250,000 house (in
today’s terms) after 5 years, and would need 20% for a down payment. Ryan is aware that his cost
estimates are in current terms and would need to be adjusted for inflation. Moreover, he knows that an
automatic payroll deduction is probably the best way to go since he is not a very disciplined investor.
Ryan is really not sure how much money he should put away each month, given the inflation effects. The
differences in timelines, and the salary increases that would be forthcoming. All this number crunching
seems overwhelming and the objective seems insurmountable. If only he had started planning and saving
five years ago, his financial situation would have been so much better. But, as the saying goes, “It’s better
late than NEVER!”

Questions:

1. What was Ryan’s starting salary? How much could he have contributed to the voluntary savings plan in
his first year of employment?

2. Had Ryan taken advantage of the company’s voluntary retirement plan up to the maximum, every year
for the past five years, how much money would he currently have accumulated in his retirement account,
assuming a nominal rate of return of 7%? How much more would his investment value have been worth
had he opted for a higher risk alternative (i.e. 100% in common stocks), which was expected to yield an
average compound rate of return of 12% (A.P.R.)?

3. If Ryan starts his retirement savings plan from January of next year by contributing the maximum
allowable amount into the firm’s voluntary retirement savings program, how much money will he have
accumulated for retirement, assuming he retires at age 65? Assume that the rate of return on the account
is 7% per year, compounded monthly and that the maximum allowable contribution does not change.

4. How much would Ryan have to save each month, starting from the end of the next month, in order to
accumulate enough money for his wedding expenses, assuming that his investment fund is expected to
yield a rate of return of 7% per year?
5. If Ryan starts saving immediately for the 20% down payment on his house, how much additional
money will he have to save each month? Assume an investment rate of return of 7% per year.

6. If Ryan wants to have a million dollars (in terms of today’s dollars) when he retires at age 65, how
much should he save in equal monthly deposits from the end of the next month? Ignore the cost of the
wedding and the down payment on the house. Assume his savings earn a rate of 7% per year (A.P.R.).

7. If Ryan saves up the million dollars (in terms of today’s dollars) by the time of his retirement at age 65,
how much can he withdraw each month (beginning one month after his retirement) in equal dollar
amounts, if he figures he will live up to the age of 85 years? Assume that his investment fund yields a
nominal rate of return of 7% per year.

8. After preparing a detailed budget, Ryan estimates that the maximum he will be able to save for
retirement is $300 per month, for the first five years. After that he is confident that he will be able to
increase the monthly saving to $500 per month until retirement. If the account provides a nominal annual
return of 7%, how much money will Ryan be able to withdraw per month during his retirement phase?

9. What is the lesson to be learned from this case? Explain.

You might also like