Jim and Anges Mitchem would like to retire in 30 years. They estimate that their

Question

Jim and Anges Mitchem would like to retire in 30 years. They estimate that their retirement income needs will be 70% of the $64,000 current annual household expenditures. They expect to receive annual social security benefits $24,000 and annual employer pension funds $12,000 upon retirement. They are comfortable with getting a 8% annual return on their investment before retirement. They expect a 7% return on their assets after retirement and will stay retired for another 40 years. Assuming a 3% inflation rate, what would the annual savings needed to fund their retirement?

Explanation / Answer

Annual Retirement Income Needs = 70% of $64,000 considering inflation of 3%

                                     =$0.70x64,000x1.0330

                                     =$108,741.36

Income from Social Security =$24,000

Income from Employer Pension Funds =$12,000

Let he funds his retirement plan deficit by investing a sum of P annually till retirement.

Total Corpus at Retirement =Px{(1-(1+0.08)-30)/0.08}

Retirement Funds from savings required at Start =(108,741.36 - 24,000 - 12000)x{(1-(1+0.07)-40)/0.07}

                                              = 72,741.36 x 13.3317

                                              = 969,766.63

Now, equating both sides,

Px{(1-(1+0.08)-30)/0.08} = 969,766.63

Px11.2577 = 969,766.63

P =$86,141.88

Hence, annual investment that needs to be done =$86,141.88

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