5 wants to retire at age 60. He currently earns $60,000 per per year. His goal B

Question

5 wants to retire at age 60. He currently earns $60,000 per per year. His goal Bill, age 45, 80% of his preretirement income. He wants the retirement income to be has an investment portfolio valued at $150,000, which is cur- adjusted for inflation verage annual returns. Bill expects inflation to average 3% and, Bill has an investment p n his family health, predicts he will ive to age 90. Billis currently saving 7 income at each year-end and expects to continue this level of savin ore any Social Security benefits for purposes of retirement planning. gs. Bill 1. What will Bil's annual income needs be at age 60? 2. Will the need be for an ordinary annuity or an annuity due? 3. How much total capital will Bill need at age 60? 4. How much capital will Bill have at age 60? 5. Will Bill have enough income at retirement? 6. What is the earliest age that Bill could retire utilizing the current savings and 7. How much would Bill need to increase his savings on an annual basis to me 8. Even assuming that Bill increases his savings to an appropriate amount, wh 9. How could the capital needs analysis be modified to reduce the risks iden investment plan? goal of retiring at age 60? the risks that may affect the success of the plan? above?

Explanation / Answer

6. Investment deficit is only 79,479. I tried changing it to 61 years working and then returement, and it showed extra surplus, hence ans is bw 60 to 61. He will have to work till aprox 60 years and 6 months

7. Ans is 10.69% from the excel model

sksnvolved:

8. Risk involved:  inflation could be more, the market could be down at the time of retirement, hence the return on investment could be less than 10% yoy.

9. More investment in debt instruments, if done in equity. Government bonds. Taking insurance.

Retirement income required $74,782.44 FV(3%, 15, 0, -C5*80%) age Salary savings Investment value C*7% increase by 10% each year and add savings each year 10.69%                                         150,000 45        60,000        6,411                                      171,411.0 61 $74,782.44 Present value of investment needed 46        60,000        6,411                                      194,963.1 62 $77,025.91 $919,714.03 NPV(10%, I5:I34) 47        60,000        6,411                                      220,870.4 63 $79,336.69 48        60,000        6,411                                      249,368.5 64 $81,716.79 Retirement corpus from investments 49        60,000        6,411                                      280,716.3 65 $84,168.29      919,719.7 E20 50        60,000        6,411                                      315,198.9 66 $86,693.34 51        60,000        6,411                                      353,129.8 67 $89,294.14 Investment deficit 52        60,000        6,411                                      394,853.8 68 $91,972.96 ($6) L6-L9 53        60,000        6,411                                      440,750.2 69 $94,732.15 54        60,000        6,411                                      491,236.2 70 $97,574.12 55        60,000        6,411                                      546,770.8 71 $100,501.34 56        60,000        6,411                                      607,858.9 72 $103,516.38 57        60,000        6,411                                      675,055.8 73 $106,621.87 58        60,000        6,411                                      748,972.4 74 $109,820.53 59        60,000        6,411                                      830,280.6 75 $113,115.14 60        60,000        6,411                                      919,719.7 76 $116,508.60 77 $120,003.86 78 $123,603.97 79 $127,312.09 80 $131,131.45 81 $135,065.40 82 $139,117.36 83 $143,290.88 84 $147,589.61 85 $152,017.30 86 $156,577.81 87 $161,275.15 88 $166,113.40 89 $171,096.80

sksnvolved:

90 $176,229.71

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