An individual is currently 30 years old and she is planning her financial needs
ID: 2787171 • Letter: A
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 $140,000 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 2 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 5.5 percent per year. If she puts her money in a blended stock and bond portfolio now, she figures she can earn 10.5 percent per year until she retires.
Retirement Planning
1.
value:
3.00 points
Required information
1) How much money will she need to withdraw each year starting at age 65 to have the same purchasing power as today? Round your answer to the nearest penny, do not enter the dollar sign in your answer.
Correct Answer: 209988.40
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2.
value:
3.00 points
Required information
2) How much money must she have at age 65 in order to make her planned withdrawals? Round your answer to the nearest penny and do not enter the dollar sign in your answer.
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3.
value:
3.00 points
Required information
3) How much should she save per year starting right now in order to have the retirement annuity she desires? Round your answer to the nearest dollar and do not enter the dollar sign in your answer.
Explanation / Answer
Current Age - 30 Year
Retirement Age - 65 Years
Years of lIfe assumed after retirement - 20 Years - Till age 85 years
Current Income - $140,000
Inflation rate assumed - 2% per annum for next 35 years.
Her Expenses requirement after 35 years i.e, on retirement is = 75% of 140,000 = 105,000
Ans 1 . Money she need to withdraw each year starting at age 65 to have the same purchasing power as today = 105,000 * (1.02)^35 = $ 209,988.43
Ans 2. Money must she have at age 65 in order to make her planned withdrawals :
Use Excel function PV with following inputs Rate 5.5% , Nper (Tenor) 20 Years, PMT (Annuity payments she requires every year) 209988.43, FV (Future value) 0.
PV = $ 2,509,441.73 ..This much money she requires at age 65.
Ans 3. Money she should she save per year starting right now in order to have the retirement annuity she desires :
Use Excel function PMT with following inputs Rate 10.5%, Nper (Tenor) 35 years, PV 0, FV (Future corpus required) 2509441.73
PMT (Annual savings required every year for next 35 years) = $ 8,250.43
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