?Anne-Marie and Yancy calculate their current living expenditures to be ?$76,000

Question

?Anne-Marie and Yancy calculate their current living expenditures to be ?$76,000 a year. During retirement they plan to take one cruise a year that will cost ?$5,000 in? today's dollars.? Anne-Marie estimated that their average tax rate in retirement would be 17 percent. Yancy estimated their Social Security income to be about $23,919 and their retirement benefits are approximately ?$35,655.

Use this information to answer the following? questions:

a. How much? income, in? today's dollars, will? Anne-Marie and Yancy need in retirement assuming 70 percent replacement and an additional ?$5,000 for the? cruise?

b. Calculate their projected annual income shortfall in? today's dollars.

c.? Determine, in? dollars, the future value of the shortfall 34 years from? now, assuming an inflation rate of 22 percent.

d. Assuming a nominal rate of return of 7 percent and 25 years in? retirement, calculate their necessary annual investment to reach their retirement goals.

Explanation / Answer

a.

Net amount reuired = (current living expenses x replacement ratio) + additional annual needs= ($76,000 x 0.70) + $5,000 = $58200.00

Gross amount required = net amount required/ (1 – average tax rate)= $58,200.00 / (1 – 0.17)= $70,120.48

b.

Present value shortfall = projected income need – projected income available = $70,120.48 - (23919+35655) - $10,546.48

c.

FV of shortfall = PV*PVF(22%, 34 years) = 10546.48*863.4441 = $9,106,297.95

d.

The question data is not correct for either part c or d. As nominal rate of return is given to be lower than inflation rate. Leave a comment if the data according to you is correct. If uncorrect, change it in the comment. I will correct the answer.

Hope this helps.

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