Saving for a Child’s Education. Harry and Sally want to prepare for their future child by saving appropriately for his/her college education. Suppose they anticipate needing the funds 20 years from today.
• Assume that the cost of a four-year college education (tuition) today is $50,000. If the inflation rate over the next 20 years averages 2% per year (i.e., the Federal Reserve Bank target rate) and the cost of education increases at the rate of inflation, then Harry and Sally will need how much money in 2037 in order to fund their son/daughter’s education? Pn = P0 (1+i)20 = $__________________. [Use Table A-3, assume n = 20 & i = 2%.] [Note: college tuition has risen faster than inflation over the past couple decades; if this is expected to continue, then Harry and Sally would need to use an i > 2%.]
• Assume that Harry and Sally want to have $_____________ (enter the figure you calculated in the problem above) available 20 years from today for their child’s education. How much must they save per year to have this amount of savings available in 2037? Assume that they plan to invest their savings in a diversified portfolio of bonds and stocks, which they anticipate will return about 6% CAGR over the next 20 years. Use the Annuity Table to determine the amount they must save & invest each year to achieve their objective. If n = 20 and i = 6%, the factor from the Table A-4 is __________. Thus, __________ (the factor from the Table) times the annuity amount = $____________ (the total needed in 20 years). Solving for the annuity = (total $ needed in 20 years)/(factor from Table) = $__________ savings per year (or, about $__________ per month).