An individual is currently 30 years old and she is planning her financial needs

Question

An individual is currently 30 years old and she is planning her financial needs upon retirement. She will retire at age 65 (exactly 35 years from now) and she plans on funding 20 years of retirement with her investments. Ignore any social security payments and ignore any taxes. She made $108,000 last year and she estimates she will need 75% of her current income in today's dollars to live on when she retires. She believes that inflation will average 4 percent per year during her working years. (For simplicity we will ignore inflation during her retirement years). She will retire at age 65 and will begin drawing down her retirement annuity at age 65. She plans on making a total of 20 annual withdrawals after she retires. After she retires she believes she will be able to earn 6.5 percent per year. If she puts her money in a blended stock and bond portfolio now, she figures she can earn 11.5 percent per year until she retires.

Explanation / Answer

35 year total inflation: 1.04^35=3.94608899421 which means she'll need $ 426177.611 per year.

She need to withdraw each year starting at age 65 to have the same purchasing power as today will be $426177.611 per year.

Her planned withdrawals are 75% of that times 20 years. So 20*426177.611*0.75=$ 6392664.164

Money must she have at age 65 in order to make her planned withdrawals is $ 6392664.164

Divide the total savings that she wants to have by 35 years. 6392664.164/35= $ 182647.5475

She should save per year starting right now in order to have the retirement annuity she desires is $ 182647.5475

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