Bill, age 45 wants to retire at age 60. He currently earns $60,000 per year. His

Question

Bill, age 45 wants to retire at age 60. He currently earns $60,000 per year. His goal is to replace 80% of his preretirement income. He wants the retirement income to be adjusted for inflation. Bill has an investment portfolio valued at $150,000 which is currently earning 10% average annual returns. Bill expects inflation to average 3% and based on his famly health, predicts he will live to age 90. Bill is currently saving7%of his gross income at each year-end and expects to continue this level of savings. Bill wants to ignore any Social Security benefits for purpsoes of retirment planings.

1) What will Bill's annual needs be at age 60?

2) Will the need be for an ordinary annuity or anannuity due?

3) How much total capital will Bill need at age 60?

4) How much capital will Bill have at 60?

5) WIll Bill have enough income at retirement?

Explanation / Answer

Current Income at age-45 60000 Retirement provision as on today @80% 48000 Bills Annual need at 60 considering inflation@3%=48000*(1.03^15) 74782.436 The above fund should be made available from age 61-90 with inflation rate 3%=Compound value of Annuity=A*[(1+i)^n - 1)/i] =(1+0.03)^30 2.427262471 Amount that Bill need at the age of 60 Fv=74782.44*((2.4272-1)/0.03) 3557650 Biils capital at the age of 60 Investment=150000*(1.10^15) 626587.2254 Contribution of 7% of 60000 for 15years 63000 Total capital available with Bill at 60 689587 It is an annuity due . No Bill will not have enough income at retire ment as he needs 3557650 but has only saved 689587

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.