Use Worksheet 14.1 to help Bill and Shirley Hogan, who\'d like to retire while t
ID: 2797434 • Letter: U
Question
Use Worksheet 14.1 to help Bill and Shirley Hogan, who'd like to retire while they're still relatively young - in about 20 years. Both have promising careers, and both make good money. As a result, they're willing to put aside whatever is necessary to achieve a comfortable lifestyle in retirement. Their current level of household expenditures (excluding savings) is around $76,000 a year, and they expect to spend even more in retirement; they think they'll need about 125% of that amount. (Note: 125% equals a multiplier factor of 1.25). They estimate that their Social Security benefits will amount to $22,000 a year in today's dollars and they'll receive another $35,000 annually from their company pension plans. They feel that future inflation will amount to about 3% a year, and they think they'll be able to earn about 12% on their investments before retirement and about 8% afterward. See Appendix A and Appendix B.
Use Worksheet 14.1 to find out how big their investment nest egg will have to be. Round your answer to the nearest dollar.
$
How much they'll have to save annually to accumulate the needed amount within the next 20 years. Round your answer to the nearest dollar.
$
WORK SHEET 14.1
PROJECTING RETIREMENT INCOME AND INVESTMENT NEEDS Name(s) Date I. Estimated Household Expenditures in Retirement: A. Approximate number of years to retirement B. Current level of annual household expenditures, excluding savings $ C. Estimated household expenses in retirement as a percent of current expenses % D. Estimated annual household expenditures in retirement (B × C) $ - II. Estimated Income in Retirement: E. Social security, annual income $ F. Company/employer pension plans, annual amounts $ G. Other sources, annual amounts $ H. Total annual income (E + F + G) $ - I. Additional required income, or annual shortfall (D - H) $ - III. Inflation Factor: J. Expected average annual rate of inflation over the period to retirement % K. Inflation factor (in Appendix A): Based on 0 years to retirement (A) and an expected average annual rate of inflation (J) of 0% 1.00 L. Size of inflation-adjusted annual shortfall (I × K) $ - IV. Funding the Shortfall: M. Anticipated return on assets held after retirement % N. Amount of retirement funds required—size of nest egg (L ÷ M) $ - O. Expected rate of return on investments prior to retirement % P. Compound interest factor (in Appendix B): Based on 0 years to retirement (A) and an expected rate of return on investments of 0% 0.0 Q. Annual savings required to fund retirement nest egg (N ÷ P) $ - Note: Parts I and II are prepared in terms of current (today’s) dollars.Explanation / Answer
Soln:
PROJECTING RETIREMENT INCOME AND INVESTMENT NEEDS Name(s) Bill & Shurley Hogan Date I. Estimated Household Expenditures in Retirement: A. Approximate number of years to retirement 20 B. Current level of annual household expenditures, excluding savings $ 76000 C. Estimated household expenses in retirement as a percent of current expenses 125% D. Estimated annual household expenditures in retirement (B × C) 95000 II. Estimated Income in Retirement: E. Social security, annual income $ 22000 F. Company/employer pension plans, annual amounts $ 35000 G. Other sources, annual amounts $ 0 H. Total annual income (E + F + G) 57000 I. Additional required income, or annual shortfall (D - H) 38000 III. Inflation Factor: J. Expected average annual rate of inflation over the period to retirement 3 % K. Inflation factor (in Appendix A): Based on 20 years to retirement (A) and an expected average annual rate of inflation (J) of 3% 1.81 L. Size of inflation-adjusted annual shortfall (I × K) 68632.23 IV. Funding the Shortfall: M. Anticipated return on assets held after retirement 8% N. Amount of retirement funds required—size of nest egg (L ÷ M) 63548.36 O. Expected rate of return on investments prior to retirement 12% P. Compound interest factor (in Appendix B): Based on 0 years to retirement (A) and an expected rate of return 9.65 on investments of 0% 0 Q. Annual savings required to fund retirement nest egg (N ÷ P) 6587.85 Note: Parts I and II are prepared in terms of current (today’s) dollars.Related Questions
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