Question1. Eleanor requires $40,000 a year to live on in retirement net of the income she will get. She will be retiring in 22 years and is funding for 25-year retirement. The inflation rate is anticipated to be 3.5 percent a year and the after-tax return on her investments percent.
a. How much will the short fall amount to at beginning of retirement period?
b. What lump sum will she need at beginning of retirement period?
c. What is the required annual savings?
Question2. Frank, age 28, wants to compute his resources in real (inflation-adjusted) terms. Calculate the amount of resources made accessible by age 65 retirements if $18,000 a year is saved. Suppose that outflows from ages 65 to 90 are at the rate of $27,000 a year. The projected inflation rate is 4 percent, and the expected investment return is 6 percent.
a. How much in new savings will Frank have accessible at age 65 before subsequent withdrawals?
b. How much will he have left at an age 90?
c. What is the present value of that sum at an age 65?
d. How much will he have to save per year to exactly meet his requirements?
Question3. The smiths had $110,000 in savings at age 51. They had a desired retirement age of 65. They desire to fund through age 92. Suppose a 4 percent inflation rate and a 5 percent after-tax rate for investment both pre- and postretirement. They have household income of $140,000, which is rising at the rate of inflation. Their expenditures consisting of taxes are $125,000 a year. They estimate that in retirement they will get $28,000 a year together in Social Security and Mr. Smith will receive a $12,000-a-year pension, both in today’s dollars. Their retirement expenses would be $90,000 a year in today’s dollars.
1. Calculate:
a. The lump sum needed at retirement.
b. Current assets available at retirement
c. Annual savings required.
d. The differentiation between needs and resources.
2. Analysis:
a. Is their retirement plan attainable as is?
b. If not, what are the alternatives which could help reconcile needs and resources?
c. What is your recommendation?