Nicci Denny, age 40, single, and from Colorado Springs, Colorado, is trying to e

Question

Nicci Denny, age 40, single, and from Colorado Springs, Colorado, is trying to estimate the amount she needs to save annually to meet her retirement needs. Nicci currently earns $65,000 per year. She expects to need 80 percent of her current salary to live on at retirement. Nicci anticipates receiving about $1900 per month in Social Security benefits at age 65.

Using the Run the Numbers worksheet on page 528, answer the following questions.

(a) What annual income would Nicci need for retirement?

(b) What would her annual expected Social Security benefit be?

(c) Nicci expects to receive $1,500 per month from her defined-benefit pension at work. What is her annual benefit?

(d) How much annual retirement income will she need from her retirement funds?

(e) How much will Nicci need to save by retirement in today’s dollars if she plans to retire at age 65 and live to age 90?

(f) Nicci currently has $15,000 in a Roth IRA. Assuming a growth rate of 8 percent, what will be the value of her Roth IRA when she retires? (Hint: Don’t take out income taxes.)

(g) How much additional money will she still need to save for retirement?

(h) What is the amount she needs to save each year to reach this goal?

RUN THE NUMBERS Estimating Your Retirement Savings Goal in Today's Dollars per year assuming a spending lifestyle at 80 percent of current income ($80,000 x 0.80), and will live an additional to be 3 percent after inflation-a reasonable but conser- would differ if the growth rate of the investments were less This worksheet will help you calculate the amount you need 20 years beyond retirement. Investment returns are assumed to set aside each year in today's dollars so that you will have adequate funds for your retirement. The example here vative estimate for a typical portfolio. The financial needs assumes that a single person is now 35 years old, hopes to retire at age 62, has a current income of $80,000, currently han 3 percent. This approach simplifies the calculations and saves and invests about $4,800 per year to an IRA account, puts the numbers to estimate retirement needs into today's contributes zero to an employer-sponsored retirement plan, anticipates needing a retirement income of $64,000 inflation occurs dollars. The amount saved must be higher if substantial

Explanation / Answer

Answers:

Q (a) = $ 52,000 (See Point a in "Workings to Answers" below)

Q(b) = $ 22,800 ( See Point b in "Workings to Answer below")

Q (c) = $ 18,000 (See Point c in "Workings to Answer below")

Q (d) = $40,800 (See Point d in "Workings to Answer below")

Q (e) = $ 119,557.56 (See Point f in "Workings to Answer below")

Q (f) = $ 102,727.13 (See Point h in "Workings to Answer below")

Q (g) = $ 16,830.64 (See Point i in "Workings to Answer below")

Q (h) = $ 230.22 (See Point l in "Workings to Answer below")

WORKINGS FOR ANSWERS

NICCI's RETIREMENT CALCULATOR

Working Amount $ a) Annual Income needed at retirement in today's Dollars 65,000*80% 52,000.00 b) Estimated Social Security retirement benefit $1,900*12 22,800.00 c) Estimated employer pension benefit in today's Dollars $1,500*12 18,000.00 d) Total estimated annual retirement income from Social Security and employer pension in today's Dollars b +c 40,800.00 e) Additional income needed at retirement in today's Dollars a-d 11,200.00 f) Amount that Nici must have at retirement in today's Dollars to receive additional annual income in retirement (e )for 25 years assuming a 8% rate of return for 25 years (90-65) : 10.6748*$11,200 PV of annuity for 25 years at 8%=(1-(1+r)^-n)/r 10.6748 119,557.76

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