Retirement

1

Bob Davidson is a 46-year-old tenured professor of marketing at a small New England business school. He has a daughter,
Sue, age 6, and a wife, Margaret, age 40. Margaret is a potter, a vocation from which she earns no appreciable income.
Before she was married and for the first few years of her marriage to Bob (she was married once previously), she worked at a variety of jobs, mostly involving software programming and customer support.
Bob’s grandfather died at age 42: Bob’s father died in 1980 at the age of 58. Both died from cancer, although unrelated instances of that disease. Bob’s health has been excellent: he is an active runner and skier. There are no inherited diseases in the family with the exception of glaucoma. Bob’s most recent serum cholesterol count was 190.
Bob’s salary from the school where be works consists of a nine-month salary (currently $95,000), on which the school pays an additional 10 percent into a retirement fund. He also regularly receives support for his research, which consists of an additional two-ninths of his regular salary, although the college does not pay retirement benefits on that portion of his income. (Research support is additional income; it is not intended to cover the costs of research.) Over the 12 years he has been at the college his salary has increased by 4 to 15 percent per year, although faculty salaries are subject to severe compression. So he does not expect to receive such generous increases into the future. In addition to salary, Bob typically earns $10,000 to 20.000 per year from consulting, executive education, and other activities.
In addition to the 10 percent regular contribution the school makes to Bob’s retirement savings, Bob also contributes a substantial amount. He is currently setting aside $7,500 per year (before taxes). The maximum tax-deferred amount he can