Allan wants to retire in 15 years at age 65. He has determined that he will need

Question

Allan wants to retire in 15 years at age 65. He has determined that he will need a capital sum of $2,354,000 at that time to provide his retirement income. He presently has a retirement plan with a current amount of S350,000 to which he will add $26,000 per year. Allan assumes that his pre- retirement and post-retirement rates of return will be 8%, and that inflation will average 3%. He expects to live to at least age 80 but wants to use age 95 for all calculations Retirement Planning Expense Method Required Retirement Amount Adjusted Rate of Return-890 Future Value of Assets 50 Current Age 65O 95 Retirement Expectancy 1st Year Retirement Income (for Q2) Shortfall (for Q1) Use the image above for additional information, answer the following questions stated below: (Q1 Demonstrate how close Allan will come to his goal of a capital sum of S2,354,000. (Q2) Calculate the amount of retirement income Allan can expect to receive when he retires at age 65. (Q3) If inflation was at a higher value, how will this affect Allan and why? List FOUR (4) possible impacts (assume investment returns cannot be safely improved)

Explanation / Answer

Q1. At the age of 65, the corpus which Allan would be having will be $1,288,667.5. So he will miss his target of $2,354,000 by $1,065,332.5 if he earns net 5% return annually on his investments. Following are the steps:-

1. In excel type =FV and open the formula dailog box

2. Enter, PV= -$350,000, N= 45 (since his age if 50 and retirement age is 65 as given in the question so we'll take the difference), PMT= $26,000, Rate= 5% & Type= 0.

3. Press Enter you'll get the value $1,288,667.5

Q2. Alan would receive $1,288,667.5 on his retirement.

Q3. Following are the four possible impacts that how higher inflation would impact Alan's corpus:-

1. Higher inflation would reduce the rate of return which will slow down the effect of compounding.

2. Higher inflation would reduce the value of corpus of Alan.

3. Alan has to invest for more years to achieve his goals had there been hgiher inflation.

4. Alan has to invest more amount anually to reach his goal in time had there been higher inflation

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