Question

Bill​ (age 42) and Molly Hickok​ (age 39), residents of​ Anchorage, Alaska, recently told you that they have become increasingly worried about their retirement.​ Bill, a public school​ teacher, dreams of retiring at 62 so they can travel and visit family.​ Molly, a​ self-employed travel​ consultant, is unsure that their current retirement plan will achieve that goal. She is concerned that the cost of living in Alaska along with their lifestyle have them spending at a level they could not maintain. Although they have a nice income of more than $100,000 per​ year, they got a late start planning for​ retirement, which is now just 20 years away. Bill has tried to plan for the future by contributing to his​ 403(b) plan, but he is only investing 6 percent of his income when he could be investing 10 percent. Use what they told you along with the information below to help them prepare for a prosperous retirement.

​Molly's income	$79,000
​Bill's income	$42,500
Social Security income at retirement	$2,550​/month
Current annual expenditures	$72,500
​Bill's Roth IRA	$20,500
​Bill's 403(b) plan	$47,400
Marginal tax bracket	25 %

3. Given their projected Social Security and investment​ income, how much will Bill and Molly need to invest annually to make up their income​ shortfall? What is the annual additional funding requirement to reach their income goal? ​(Round to the nearest​ dollar.)

Answer 1

Note:- The problems related to retirement and investments includes TVM (time value of money) and inflation rates as the most important factors. But since no interest rates have been provided, the below calculations will ignore TVM factor.

Given:-

Bill's current age (years) = 42

Expected retirement age = 62

No. of years for retirement = 2

social security income at retirement = 2550 per month

1.) calculating social security and investment icome

a. social security income:- the earliest a person can start receiving Social Security retirement benefits will remain age 62.If you start receiving retirement benefits at:

• age 62, you will get 75 percent of the monthly benefit because you will be getting benefits for an additional 48 months.

that means social security income = 2550 * 75% = $1912.5 per month

= $22950

b. investment income:-  roth IRA:- Bill is a married person and his income exceeds 10000 annually hence he becomes ineligible for roth IRA.

403 b plan =$47400 (no taxes and no penalty since retiring age is 62)

SSI = $22950

Total = $70350

current annual expenses = $72500

Shortfall = 72500 - 70350 = $2150