John and Mary are both 62 years old and want to retire comfortably. John has been with his company for 22 years, and his wife doesn't work. John says he would like to retire at age 65. They do not have a specific income goal in mind for retirement, but they reviewed their spending habits to get a good idea. They noted that they currently spend $50,000 per year to maintain their lifestyle. They eventually come to the conclusion they would need $60,000 pre-tax in today's dollars at retirement. Johns current income is $95,000. They are both healthy and plan to live until age 85. John participates in his companies 401k plan, which he can contribute up to 15% with the company matching the first 3%. John's annual contribution is expected to be 9,000, and the expected return is 8%. They also have investments in IRAs which are secured by zero coupon bonds which mature on the retirement date and yield 8%. At 65 John will receive $22,000 from social security and Mary will receive $12,000. The current value of their investment account is $160,000, Johns 401k is $86,000, Johns IRA is $22,300, and Mary's IRA is $11,000 for a total of $279,300 on July 31, 1995.
A. What are the key variables in retirement planning?
B. How much in annual income will the Jordan's require at retirement in three years if the inflation averages 4% per year?
C. Assume that the John will retire July 31, 1998. The Jordans will require annual income from part B over their life expectancy. Draw a timeline to show the required income stream. Assume income stream will be constant (no inflation). The payments will be received at the beginning of the year. How would you describe the income stream?