Eleanor needs $40,000 a year to live on in retirement net of the income she will receive. She will be retiring in 22 years and is funding for a 25-year retirement. The inflation rated is expected to be 3.5 percent a year and the after-tax return on her investments 6 percent.
a) How much will the short fall amount to at the beginning of the retirement period?
b) What lump sum will she need at the beginning of the retirement period?
c) What is the required yearly savings?
Frank, age 28, wants to calculate his resources in real (inflation-adjusted) terms. Calculate the amount of resources made available by age 65 retirement if $18,000 a year is saved. Assume that outflows from ages 65 to 90 are at the rate of $27,000 a year. The projected inflation rate if 4 percent, and the anticipated investment return is 6 percent.
a) How much in new savings will Frank have available at age 65 before subsequent withdrawals?
b) How much will he have left at age 90?.
c) What is the present value of that sum at age 65?
d) How much will he have to save per year to exactly meet his need?
The Smith's had $110,000 in savings at age 51. They had a desired retirement age of 65. They want to fund through age 92. Assume 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 increasing at the rate of inflation. Their expenditures including taxes are $125,000 a year. They estimate that in retirement they will receive $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 expenditures 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. Yearly savings needed.
d. The difference between needs and resources.
2. Analysis
a. Is their retirement plan achievable as is?
b. If not, what are the alternatives that could help reconcile needs and resources?
c. What is your recommendation?