An individual is currently 30 years old and she is planning her financial needs

Question

An individual is currently 30 years old and she is planning her financial needs upon retirement. She will retire at age 65 (exactly 35 years from now) and she plans on funding 20 years of retirement with her investments. Ignore any social security payments and ignore any taxes. She made $130,000 last year and she estimates she will need 75% of her current income in today's dollars to live on when she retires. She believes that inflation will average 1 percent per year during her working years. (For simplicity we will ignore inflation during her retirement years). She will retire at age 65 and will begin drawing down her retirement annuity at age 65. She plans on making a total of 20 annual withdrawals after she retires. After she retires she believes she will be able to earn 6 percent per year. If she puts her money in a blended stock and bond portfolio now, she figures she can earn 10 percent per year until she retires.

Income During Retirement:

1) How much money will she need to withdraw each year starting at age 65 to have the same purchasing power as today? I already got this answer: 138118.77

Amount Needed at Retirement

2) How much money must she have at age 65 in order to make her planned withdrawals? (2 decimal places)

Required Annual Savings

3) How much should she save per year starting right now in order to have the retirement annuity she desires? (2 decimal places)

Explanation / Answer

1) The answer you have calculated for this question is correct

This amount = 130,000 * 75% * 1.0135 = 138118.77

2) The above calculated amount had to be withdrawn for 20 years starting from age 65.

So present value (when she is 65) of this investment is calculated as follows

=PV(6%,20,-138118.77,0,1) = $$1,679,264.10

Here 6% is interest rates after she retires, 20 is number of withdrawals, 138118.77 is the withdrawal amount, 0 is the future value, i.t at age 85 and last 1 is to specify withdraw is done at the beginning of the year

3) Now calculate this question considering scenario as follows

PV = 0 (no savings are done yet)

FV = $1,679,264.10 ( This should be the amount at the age of 65)

NPER = 35 (No of investments made)

Rate = 10% (Given in the question)

So PMT (Investment per year) is calculated as follows = PMT(10%,35,0,-1679264.1,1) = $5,632.72

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