Precisely 179 days ago, you bought the winning Mega Zillions ticket with a jackpot worth $25 million dollars! The ticket expires tomorrow, and tonight is decision night Option 1: Tear the ticket up and throw it away Option 2: Cash the ticket and take the jackpot as a lump sum. Option 3: Cash the ticket and take the jackpot in annual installments over a 20-year period. (The Lottery Commission offers you no interest on this option, it’s simply the lump sum divided out into 20 equal payments.) The tax rate today is 40 percent. If you were to claim the prize as a lump sum, the government would take 40 percent of the winnings, and every year thereafter, the government will charge you 27 percent taxes on any interest earned the previous year. If you choose Option 3, the government will charge you 40 percent on every installment, plus 27 percent on any interest you earned from the previous year. You can assume these tax rates will hold steady over the next 20 years. Inflation, the cost of living, and the purchasing power of the US Dollar is at a multiyear high around eight percent. As with taxes, no one knows what the future holds. The most likely outcome is inflation will hover around its current value for the next twenty years, a pessimistic outcome is that it soars to thirty-two percent, and the optimistic outcome is that it settles back down to three percent. Presently, you own a house (which has a mortgage that you’ve been paying on for exactly seven long years (just completed the 84th monthly payment), but still owe $432,955 on). You have $100,000 in combined college-related and revolving credit debt that you’ll pay off in ten or fifteen more years, but most of all, you love your job and are respected by your supervisors and peers and direct reports. You have a bright career ahead of you should you choose Option 1. Your current gross salary is $150,000, and with steady (roughly linear) pay increases, you’ll probably be making well over $250,000 in ten years from now. Your current annual household expenditures are approximately $75,000, and every year, you put the remainder of your net earnings into a company-sponsored retirement account. If you decide on Options 2 or 3 you have a trusted financial advisor. your advisor will charge you a “generous” flat annual fee of $80,000 if you choose Option 2 and $48,000 if you choose Option 3. The fee would begin in the first year, and thereafter, be adjusted annually to keep up with inflation. You can also expect to shell out a lot of money in legal expenses to keep all your enemies and long-lost relatives at bay. $200,000 per year for Option 2, $120,000 per year for Option 3. This fee would also begin in the first year and be adjusted for inflation every year. You’ll also need to upgrade your home security system, and in addition, pay securtity system with a one-time total installed cost of $100,000 which would need to be paid immediately. The annual security payment for Option 2 is $227,000, while it’s only $136,200 for Option 3. The security detail payments would begin in the first year, and like the other fees, will also be adjusted for inflation every year. If you choose Option 2, you estimate you’ll spend a combined total of $200,000 in new living expenses every year, beginning the first year. If you choose Option 3, you estimate you’ll live a bit more modestly, and will only spend $120,000 per year on these same “lifestyle expenses,” beginning the first year 24a. Given the above information, what inflation rate will you use for your calculations? (Hint: Beta Mean!) 24b.Assuming you’ve made all your payments on time, never once paid any extra, and your mortgage rate is 6.125%, produce an amortization schedule based on the information above. Be sure to highlight how much money you currently have left to pay on your mortgage. 24c. In tabular format, juxtapose Options 2 and 3 accounting for all annual benefits and expenses. 24d. For Options 2 and 3: Assuming you immediately paid off your mortgage and outstanding debt, and furthermore, assuming all the assumptions above are correct and there are zero deviations over a 20-year period, what would be the respective balances of your estate (juxtapose Options 2 and 3) at the end of the 20th year? Secondly, once you’ve calculated those figures, what would be the present worth of your estate at that point in time, but in today’s dollars? 24e. Your company-sponsored retirement account earns an average of 9% growth per annum. Assuming the total of all deductions (e.g., federal and state taxes, social security, medical insurance, vision, etc.) from your annual salary comes to 30% of your gross pay, how long will it take you to save $2,000,000 24f. Adjusting for inflation, what would the purchasing power be in today’s dollars of your two-million-dollar retirement savings when your company-sponsored retirement account finally reaches its goal?
24. Precisely 179 days ago, you bought the winning Mega Zillions ticket with a jackpot worth $25 million dollars! The ticket expires tomorrow, and tonight is decision night
Option 1: Tear the ticket up and throw it away
Option 2: Cash the ticket and take the jackpot as a lump sum.
Option 3: Cash the ticket and take the jackpot in annual installments over a 20-year period. (The Lottery Commission offers you no interest on this option, it’s simply the lump sum divided out into 20 equal payments.)
The tax rate today is 40 percent. If you were to claim the prize as a lump sum, the government would take 40 percent of the winnings, and every year thereafter, the government will charge you 27 percent taxes on any interest earned the previous year. If you choose Option 3, the government will charge you 40 percent on every installment, plus 27 percent on any interest you earned from the previous year. You can assume these tax rates will hold steady over the next 20 years. Inflation, the cost of living, and the
Presently, you own a house (which has a mortgage that you’ve been paying on for exactly seven long years (just completed the 84th monthly payment), but still owe $432,955 on). You have $100,000 in combined college-related and revolving credit debt that you’ll pay off in ten or fifteen more years, but most of all, you love your job and are respected by your supervisors and peers and direct reports. You have a bright career ahead of you should you choose Option 1. Your current gross salary is $150,000, and with steady (roughly linear) pay increases, you’ll probably be making well over $250,000 in ten years from now. Your current annual household expenditures are approximately $75,000, and every year, you put the remainder of your net earnings into a company-sponsored retirement account.
If you decide on Options 2 or 3 you have a trusted financial advisor. your advisor will charge you a “generous” flat annual fee of $80,000 if you choose Option 2 and $48,000 if you choose Option 3. The fee would begin in the first year, and thereafter, be adjusted annually to keep up with inflation. You can also expect to shell out a lot of money in legal expenses to keep all your enemies and long-lost relatives at bay. $200,000 per year for Option 2, $120,000 per year for Option 3. This fee would also begin in the first year and be adjusted for inflation every year. You’ll also need to upgrade your home security system, and in addition, pay securtity system with a one-time total installed cost of $100,000 which would need to be paid immediately. The annual security payment for Option 2 is $227,000, while it’s only $136,200 for Option 3. The security detail payments would begin in the first year, and like the other fees, will also be adjusted for inflation every year. If you choose Option 2, you estimate you’ll spend a combined total of $200,000 in new living expenses every year, beginning the first year. If you choose Option 3, you estimate you’ll live a bit more modestly, and will only spend $120,000 per year on these same “lifestyle expenses,” beginning the first year
24a. Given the above information, what inflation rate will you use for your calculations? (Hint: Beta Mean!)
24b.Assuming you’ve made all your payments on time, never once paid any extra, and your mortgage rate is 6.125%, produce an amortization schedule based on the information above. Be sure to highlight how much money you currently have left to pay on your mortgage.
24c. In tabular format, juxtapose Options 2 and 3 accounting for all annual benefits and expenses.
24d. For Options 2 and 3: Assuming you immediately paid off your mortgage and outstanding debt, and furthermore, assuming all the assumptions above are correct and there are zero deviations over a 20-year period, what would be the respective balances of your estate (juxtapose Options 2 and 3) at the end of the 20th year? Secondly, once you’ve calculated those figures, what would be the present worth of your estate at that point in time, but in today’s dollars?
24e. Your company-sponsored retirement account earns an average of 9% growth per annum. Assuming the total of all deductions (e.g., federal and state taxes, social security, medical insurance, vision, etc.) from your annual salary comes to 30% of your gross pay, how long will it take you to save $2,000,000
24f. Adjusting for inflation, what would the purchasing power be in today’s dollars of your two-million-dollar retirement savings when your company-sponsored retirement account finally reaches its goal?
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