Academic journal article Journal of the International Academy for Case Studies

Teaching Note Which Retirement Plan Is Best for Ann Smith?(Instructor's Note)

Academic journal article Journal of the International Academy for Case Studies

Teaching Note Which Retirement Plan Is Best for Ann Smith?(Instructor's Note)

Article excerpt


Ann Smith had just started a new position as a junior executive at Fowler Inc. five weeks ago. She was finally well settled into her new job and was now focused on sifting through all the details of the retirement plan options available to her through her employer. The plan choices available differed considerably in their characteristics and the variables that affected possible retirement income. Complicating the decision was the fact that the retirement income under the available choices was a function of how many years Ann will work with her current employer, at what age she decides to retire, how many years she spends in retirement, how risk averse she is, and what the expected return of investment is. Answers for these issues would result in big differences in the retirement benefits. Time was of the essence since a retirement plan had to be chosen within the first 60 days of employment. Otherwise it would result in a default selection of the ERS. Moreover, once a retirement plan was chosen it would be irrevocable.

Ann could not delay her retirement choice any longer. She had only three weeks left in the 60-day window allowed for making a decision. She and her husband Frank were in the process of gathering as much relevant information as possible. They would then put their heads together to make the best decision about this critical financial choice that would have a significant impact during their time in retirement.


This case provides an opportunity to examine one of life's important decisions--which retirement plan option works best for me? With increased life expectancies, it is not uncommon for people to spend 20 years or more in retirement. This combined with the fact that the selection of a retirement option plan is often irrevocable underscores the need to make a good choice.

The case is appropriate for assignment in both undergraduate and graduate accounting and finance classes. Several possible teaching approaches can be used to present this case. In its simplest form, by covering just the basic fundamentals, the case would be an introduction to retirement plan decisions in general while also serving as an exercise to enhance spreadsheet skills. In a more advanced setting, the requirements in the case can be used to motivate class discussion of the relevant individual variables, such as age, life-expectancy, time value of money, net present value, expected return on investment, and cost-of-living adjustments, that affect retirement plan choice.

An important objective of the case is to teach students to appreciate that any prediction of the future detailed enough to be useful for planning purposes will inevitably contain errors. On the other hand, any forecast oversimplified down to just a few details in order to avoid errors will be essentially useless for planning purposes. This is the fundamental paradox that renders detailed single point forecasts unworkable. The best approach to this is the consideration of multiple alternative scenarios, as demonstrated in this teaching note. These scenarios of the future should be customized to deal with the specific needs and circumstances of an individual, capturing a full range of plausible outcomes, with each individual scenario containing enough detail to be useful to decision-makers. After calculating projected retirement incomes under varying assumptions, students will be required to choose the "best" retirement plan option based on the scenario that seems most appropriate or most likely to occur.

The material in the case can be covered by asking students to do analysis individually or by employing a team learning approach. If small groups are already being used in the course, the case materials can be used effectively as a mini-test in which students are graded individually and in groups on case requirements. On an individual basis and prior to class, students can be assigned the basic requirements. …

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