Question

You are 22 years old, college grad with a full-time job in your career, thinking about saving for retirement.

You go to a financial planning site to get some ideas.

The site asks you the following questions:

1. At what age do you think you would like to retire?
2. How much money do you feel you would need per year to live on during the first year of retirement?   (consider housing, medical expenses, travel, etc. – many financial experts suggest 80% to 100 % of your income when you retire)
3. How is your health, what age would you look to have retirement benefits for?
4. How comfortable are you with risk? Would you consider yourself a risky investor – you are fine with the ups and downs of the stock market? (use an investment rate from 10% to 14%) Moderate risk – would like some growth from the stock market but would like safer investments such as bonds as well? (use an investment rate between 5% and 9%) Or low risk investor – mostly bonds, CD’s money markets? (use an investment rate between 2.5% and 5%)

Fill in answers:

Age now: 22

Age at retirement: 50   (difference between age at retirement and age now must be greater than 15 years)

Age want to receive retirement income until (suggest between 80 and 100): 95

Investment rate: 12%

Inflation rate: 2.4% (average rate over last 50 years = 3.5%, choose a rate between 1% and 6%)

Current year’s salary: $50,000

Amount you have already saved for retirement: $10,000 (must be greater than $100)

Amount you want to leave to heirs: $2,000,000 (must be greater than $1000)

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1. Calculate the amount of money you will need the first year of retirement: To do this you will calculation the number of years until retirement: Age at retirement – age now. Next assume you will progress in your career and make 3% more per year then the rate of inflation you chose: so now grow your current year’s salary by inflation plus 3% for the number of years until retirement. We will assume here that you want to continue with 100% of that amount, so that is the amount you need for the first year of retirement.

2. Calculation the amount you will need the day you retire if you want the amount you calculated in part 1 paid out annually from the day you retire until the last date you want to receive retirement income and you want to leave nothing to your heirs. Assume the rate of return you will receive during this period is 2% less than the investment rate you chose above (people generally invest a little bit more conservatively during retirement).

3. Now do the same calculation as part 2, but include the amount you decided to leave to your heirs above.

4. Using your answer to part 3, find the equal annual amount you would need to save every year from the age you input as now until the date you retire to reach the amount in answer 3, use the investment rate you chose above.

5. Now let’s assume you are 10 years into saving for your retirement, so 10 years older than what you chose as your age now and assume you earned 2% less than expected on your investments and you ended up putting away only half as much as you assumed above. Now calculate the equal annual amount you would need to save every year to still save to the amount in part 3, assuming you can now earn the assumed investment rate.

6. Assume that the amount you calculate in part 5 is too much for you to possibly save, suggests so ethical options.

PLEASE SHOW ALL CALCULATIONS FOR #1-#6.

Answer 1

95 Age as q Now = 22. Age as an extrement =850 . Age want to merie retue Innome writer = Inuestment rate : 12% Inflation rate = 2.4% Gurent Sabry = $50, w or Amant same fol etuenient = $10,00 Ant to be left for heis = $ 2 wo ano Amt 9 money reg. till fast year a rettlement Age at retuement - Age New = 50 - 22 = 28 years Amount - & snew year with 2.4% +3% jnway yeraly . Ant @ rettement age = $5000X PUAF[i+ Rate] 28 Amt. = $5000 XPVAF [ +5.4%]2 i Amt = $50, 10 x 14.27 un Anta $ 713,582.34 . Ant rua. O retirement = $713,582.34 2. Ant reg. annually from age of retirement till the age want to maine Income . Ant your = $713, 582.34 95-50 Anthyay = $15,857.39 Rate a Return = 12% les 2% = 10% L Amount = cs Scanned withment = CamScanner $15,857.39 X PVAF [1 + 107145 $ 156,398.39

I Ant pe you in Part 1 = $15,857.39 Interest = 10% az Anut want to have to heis = $2,00 au - Total Amt. = $15,857.39 + $2,000, an 45 = $60,301.83 . Total Ant = $60,301.83 x [[ + PUAF 10% "S Total Amb = $594,745.364 34 Ant to be Saud = $0.00 ? Tota yauy = 50-22 =28 Inustment Rate = 12%. Total Amount o retirement age = 113582.34 . Amant = $10,0 $X [1 + PVAF 12%] Amaut= $79844.23 Total Amant = Amount saved yearly x [I+PVIF@ 12%] 713582.34 = Amant X [P+7.9847 Amant = $ 79 428.132 4. Ant pel you as pu part 3 = $60,301.83 - Incest mat late 932 geny = 28 I Amomut = $60, 301.83 XHPVIE 12% cs Scanned Aimant - $481475.30 CamScanner !

Amount req. Annuel for saving = $481475,30 = $17/95.55 so 22 - 5 0 yos juen now, Ant a laving p be = $171955.5 @ 12% q savings @ carred = 0.12% - $171955.5 - 0.10% - ? ? $143296.25 Amt a Sanings = $ 143296.25 for 10 gany But Saving for 10 yay = $143296.15 @ 50% = $71648.125 . Ant p be reg. to be saved = $ 481 475.30 - $71648.13 7 28-1 And reg. to be saved $ 22, 768.18 Sime the Armant rep above i. $22, 168.18 is to rough to ane yearly . it's advised that the Individual needs to investment the amant o in all the 3 possible optisis with Lignes investment in Moderate Investments and anal investments in Rik tue & Risty Investments. seanned with CamScanner