Question

The Goal Is to be able to withdraw $60,000 a year. From 65 to age 85

1. YOUR ESTIMATE/BEST GUESS: I intend to withdraw $_________________ at the END of each year from my retirement account to support my lifestyle. Input how much you think you need to live comfortably in your retirement years. To help you with your estimate, experts estimate you should plan to have approximately 70% of your ending salary in your retirement years in order to maintain your standard of living. (Assume no pension or Social Security benefits.)

When I retire, my goal is to have saved $_______________________ in a retirement account. I believe these funds will be sufficient to maintain my desired lifestyle through my retirement years. Input this figure BEFORE you calculate anything on the Excel template. Just take a guess. What do you think is a reasonable amount to have as your nest egg on the day you retire (age 65 in this example) that would support the annuity withdrawal from the previous question.

Based on my total retirement savings from question #5, assuming those funds are invested at 5% compounded annually, I am able to withdraw $______________ from my retirement fund each year over the next 20 years. (Show all inputs below.) Compute with the financial calculator (solve for PMT).

INPUTS:             N =

I/Y =

FV =

PV =

PMT =

In order to meet your retirement goals (withdrawing an annuity stream for 20 years) from question #4, how much would you need to have in your retirement account at age 65? In other words, based on the amount of the annuity from question #4, the total retirement savings account must have an actual balance of $______________ in the account on the day of retirement at age 65 assuming a rate of 5% compounded anually. This is a present value of annuity calculation (CPT PV). (Show all inputs below.)

INPUTS:             N =

I/Y =

FV =

PV =

PMT =

Review your answers from questions #4-#7. This is just the “off the cuff” approach to retirement planning. How close were you to “reality”? What are your thoughts or conclusions?

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Now let’s take a more analytical approach to retirement planning:

INPUT INTO TEMPLATE:

I hope to have $___________________ of retirement savings in the bank by age 30.

I hope to earn $___________________ per year when I’m 30.

I hope to earn $___________________ per year when I’m 40.

I hope to earn $___________________ per year when I’m 50.

I hope to earn $___________________ per year when I’m 60.

If my life expectancy is age 85, my retirement years will total ________.

SHOW WORK IN THE TEMPLATE: Assume I invest 15% of my salary annually based upon the above salaries at a savings rate of 6.5% compounded annually. At retirement age, my nest egg (including the retirement funds I had saved by age 30) would total:

$_______________________   (from Excel template)

Answer 1

1).  I intend to withdraw $60,0000 at the END of each year from my retirement account to support my lifestyle. (Number is provided.)

2). When I retire, my goal is to have saved $1,000,000 in a retirement account. I believe these funds will be sufficient to maintain my desired lifestyle through my retirement years. (Estimate of how much savings would be in the retirement account, at the time of retirement.)

3). N = 20; I/Y = 5%; FV = 0; PV = 1,000,000, CPT PMT. PMT = 80,242.59

Assuming those funds (1,000,000 estimated) are invested at 5% compounded annually, I am able to withdraw $80,242.59 from my retirement fund each year over the next 20 years.

4). N = 20; I/Y = 5%; PMT = 60,000; FV = 0, CPT PV. PV = 747,732.62

The total retirement savings account must have an actual balance of $747,732.62 in the account on the day of retirement at age 65 assuming a rate of 5% compounded anually. This is a present value of annuity calculation (CPT PV).

5). How close were you to “reality”? What are your thoughts or conclusions? - My estimate of the amount in the retirement savings account at the time of retirement was more than I would need to fund my estimate of annual withdrawals of $60,000. So, if I aim at having $1,000,000 in the retirement account by the time I retire, I would be very comfortably placed to be able to manage expenses and also, have a buffer.

6).

I hope to have $50,000 of retirement savings in the bank by age 30.

I hope to earn $120,000 per year when I’m 30.

I hope to earn $175,000 per year when I’m 40.

I hope to earn $250,000 per year when I’m 50.

I hope to earn $350,000 per year when I’m 60.

If my life expectancy is age 85, my retirement years will total 20 years. (85 - 65 = 20)

Formula	N	I	PMT = 15%*I	=FV(N, 6.5%,PMT)	a	V = FV*(1+6.5%)^(65-a)
Age group	Number of years	Income per year	Savings per year	Total amount at the end of Age-group	End of age group	Value at the time of retirement
30-39	10	120,000	18,000	242,899.61	39	1,248,868.21
40-49	10	175,000	26,250	354,228.59	49	970,235.89
50-59	10	250,000	37,500	506,040.85	59	738,385.60
60-65	6	300,000	45,000	317,867.74	65	317,867.74
					Total	3,275,357.45

Note: All values are being calculated as ordinary annuities.

FV of the retirement savings of $50,000 at age 65 = 50,000*(1+6.5%)^(65-30) = 453,112.74

Total amount in retirement account by age 65 = 3,275,357.45 + 453,112.74 = 3,728,470.20

At retirement age, my nest egg (including the retirement funds I had saved by age 30) would total: $3,728,470.20