Question

When Tom retires at age 67, he wishes to withdraw all his superannuation as a lump sum and use that to invest in an annuity that pays him $80,000 each year for 15 years. This $80,000 income comprises of part principal draw down on the lump sum he invested and part interest he earns from the return on his lump sum. Tom can earn a 3% p.a. return on his lump sum investment. By the final year, he will have drawn down his initial investment to 0. Based on these terms, calculate the lump sum amount of superannuation Tom needs to have at 67, in order to achieve his target payment of $80,000 each year for 15 years.

Tom now wishes to know whether he can reach the lump sum of superannuation required. He is currently 40 years old and having just moved to Australia, has $0 in superannuation. He earns $135,000 each year which he expects to increase by at least the annual inflation rate of 1.5% p.a.. He has to contribute the mandatory 9.5% of his annual salary into a superannuation fund which is forecasted to earn 6% p.a. in the long run. Upon reaching retirement age, calculate the amount of superannuation accumulated and identify whether it is sufficient or not to meet his retirement plans.

Answer 1

This is the question of annuity where we need to apply time value of money to calculate the present value of all future payouts.

Annuity yearly payout = $80000

Number of years = 15

Rate of Return = 3%

Here, to calculate initial investment needed, we need to calculate all the present value of future payout i.e. present value of all 80,000 payments.

Thus, Initial Payment Required = Annual Payout * PVF-OA_15,3%

= $ 80000 * 11.93794

= $ 9,55,035

To calculate the amount of superannuation accumulated, we need to calculate the future value of all payouts in the fund.

Thus, Accumulated Superannuation Fund is 962575

He will be able to meet the requirement provided he deposit even the last year salary into the funds.