At your age (assume 20) you can assume that you will live to be 100. If you grad

Question

At your age (assume 20) you can assume that you will live to be 100. If you graduate at 23 and start to work, you can expect to work for 47 years, until age 70. At that time you will be eligible for full Social Security benefits, which can reasonably be expected to be $3,000 per month, and which will be received monthly for the rest of your life. You can reasonably expect that your retirement savings will earn an average of 8 percent per year throughout the period that you accumulate your retirement funding and during your retirement years. Further assume that you will want to have an annual income of $120,000 throughout your retirement.

Briefly explain how you think those funds should be managed. That is, suggest a reasonable overall plan to achieve your goal, using all of the tools we have considered throughout the course.

Thanks a lot!!!

Explanation / Answer

As you are eligible for social security benefits of 3000 per month, you need to save for only rest of your needed retirement surplus ie

Total retirement funding required = Annual Retirement Income- Annual Social Security benefits = 120,000-12*3000 = $84,000

Number of years in retirement(nper) = 30 years

Now Retirement Corpus=PV(rate, nper, pmt) where rate can be assumed to be 8%(opportunity cost)

= PV(8%,30,84000)= $ 945,654

You will need the above amount in your retirement savings account to receive the retirement annual income.

For this, you will need to contribute for 48 years including 70th year till retirement

PMT(rate,nper,pv,FV) = PMT( 8%/12, 48*12,,945,654) = $ 140 in your retirement account every month from age 23. to receive the surplus. (where FV = Future Value at retirement).

So You will need to contribute $ 140 of your monthly income in retirement account every month to have an annual income on $ 120,000 throughout your retirement.

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