1. Alonzo plans to retire at age 67. His current expenses are $40,000, and he ex
ID: 2793878 • Letter: 1
Question
1. Alonzo plans to retire at age 67. His current expenses are $40,000, and he expects 3 percent inflation from now until retirement.
a). Use the replacement ratio method to estimate Alonzo’s pretax retirement income needs in the first year of retirement, assuming that he is now 22 years old and will need to replace 80 percent of his final salary.
b). Use the replacement ratio method to estimate Alonzo’s pretax retirement income needs in the first year of retirement, assuming that he is now 42 years old and will need to replace 80 percent of his final salary.
c). Use the adjusted expense method to estimate Alonzo’s retirement income needs in the first year of retirement, assuming he is currently 22 years old. For this part, assume that reduction in expenses for employment costs and mortgage payments will save him $15,000 per year in current dollars and that his additional costs for insurance and vacations will be $10,000.
Alonzo's retirement needs in the first year of retirement will equal $_____ in today’s dollars or $_____ upon retirement at age 67.
Explanation / Answer
The Replacement ratio method of retirement savings help us to figure out how much money a person should save each year to reach his/her retirement income goals.
a) Per the above details, using the replacement ratio method, Alonzo's pretax retirement income woule be as under - 121,011
b) 67,001
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