wants to retire at age 60. He currently earns $60,000 per 80% of his preretireme

Question

wants to retire at age 60. He currently earns $60,000 per 80% of his preretirement income. He wants th year. His goal e retirement income adjusted for inflation. Bill h as an investment portfolio valued at $150,000, which is cur- to be use arning 10% average annual returns. Bill expects inflation to average 3% based on his family health, predi of his gros wants to ignore any Soc and ill is currently saving 7% cts he will live to age 90. B s income at each year-end and expects to continue this level of savings. Bill ial Security benefits for purposes of retirement planning. 1. What will Bill's annual income needs be at age 60 2. Will the need be for an ordinary annuity or an annuity due? 3. How much total capital will Bill need at age 60? 4. How much capital will Bill have at age 60? 5. Will Bill have enough income at retirement? 6. What is the earliest age that Bill could retire utilizing the current savings and investment plan? goal of retiring at age 60? the risks that may affect the success of the plan? 7. How much would Bill need to increase his savings on an annual basis to meet 8. Even assuming that Bill increases his savings to an appropriate amount, what 9. How could the capital needs analysis be modified to reduce the risks identif above?

Explanation / Answer

1) Bill's annual income today is $60,000. 80% are his retirement needs. i.e. $48,000. Now 48000 inflated for 15 years @3% will be 48000*1.03^15 = $74,782

So his income needs at the age of 60 will be $74,782

2) Since he will need the money upfront to take care of his expenditures for the whole year, need will be of annuity due.

3) Now for increasing annuity, the capital reqquired is

P / (r-g) * (1 + ((1+g)/(1+r))^30) where g is growth rate 3%; r = 10%; P = 74,782 (first payment)

put these values, Capital required = 74782/7% * (1 + (1.03/1.1)^30)

= 74782/7%*1.1391 = $1,216,919.9

4) Now bill saves 7% i.e. $4,200 every year and already has $150,000 in the portfolio. So lets calculate the FV. Input the following in the financial calculator and calculate the FV

PV = 150,000; 1/y = 10%; PMT = 4200; n = 15; calculate FV = $760,031.6

So he does not have enough for his retirement.

5) No

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