《金融学(第二版)》讲义大纲及课后习题答案详解 第五章

CHAPTER 5

LIFE-CYCLE FINANCIAL PLANNING

Objectives

In this chapter you will learn how to analyze:

•How much to save for retirement.

•Whether to defer taxes or pay them now.

•Whether to get a professional degree.

•Whether to buy or rent an apartment.

•How to minimize estate taxes.

Outline

5.1 A Life-Cycle Model of Saving

5.2 Taking Account of Social Security

5.3 Deferring Taxes Through Voluntary Retirement Plans

5.4 Should You Invest in a Professional Degree?

5.5 Should You Buy or Rent?

Summary

•In making lifetime saving/consumption decisions:

(1) Do the analysis in real terms (constant dollars) to simplify the calculations and to avoid having to

forecast inflation.

(2) Start by computing the present value of your lifetime resources. The present value of your lifetime

spending cannot exceed this amount.

•Social security or any other forced saving program will offset voluntary saving. It may have a positive or a negative effect on the present value of your total lifetime resources.

•Tax-deferred retirement accounts are advantageous because they allow you to earn a before-tax rate of return until money is withdrawn from the account. They are advantageous if you are in the same tax bracket before and after you retire, and even more so if your tax bracket is lower after you retire. •Getting a professional degree can be evaluated as an investment in human capital. As such, it should be undertaken if the present value of the benefits (such as increase in your earnings) exceeds the present value of the costs (such as tuition and forgone salary.)

•In deciding whether to buy or rent an apartment or a consumer durable, choose the alternative with the lower present value of costs

Solutions to Problems at End of Chapter

Saving for Retirement

1. Assume that you are 40 years old and wish to retire at age 65. You expect to be able to average a 6% annual rate of interest on your savings over your lifetime (both prior to retirement and after retirement). You would like to save enough money to provide $8,000 per year beginning at age 66 in retirement income to supplement other sources (social security, pension plans, etc.). Suppose you decide that the extra income needs to be provided for only 15 years (up to age 80). Assume that your first contribution to the savings plan will take place one year from NOW.

a.How much must you save each year between now and retirement to achieve your goal?

b.If the rate of inflation turns out to be 6% per year between now and retirement, how much will

your first $8000 withdrawal be worth in terms of today’s purchasing power?

SOLUTION:

a. Age 40 41 65 66 80

Time 0 1 25 26 40

. . . .

X X 8,000 8,000

It is a 2 part computation. First compute the amount needed at age 65 to finance the $8,000 per year annuity

in terms of today’s purchasing power.