Question

Capital need analysis is the process of calculating the amount of investment capital needed at retirement to maintain the pre-retirement lifestyle and mitigate the impact of inflation during the retirement years. You as a financial planner, attempt to calculate your client, Abu amount of capital needed at this retirement using this analysis. Below is the information of your client:
-He is 30 age years old

-Asumme Wage Replacement Ratio(WRR) 80%
-Currently make RM60,000 per year
-Inflation expected to be 4% for his entire life expectancy
-Expected to earn 10% on his investments and retire at age 60 and possibly living to age 80
-Social Security retirement benefit expected to be RM20,000 per year.
Your client Abu prefer to calculate the capital needed at his retirement using Annuity method and Purchasing Power Preservation.

Answer 1

1. Salary on retirement = current salary * (1 + Inflation)^Years

Salary on retirement = 60000 * (1 + 0.04)^30

Salary on retirement = 194603.85

2. Yearly withdrawal required during retirement = Salary on retirement * Wage replacement ratio - Social Security = $194603.85 * 80% - 20000 = $135683.08

3. Inflation adjusted rate of return = ((1 + Expected return) / (1 + Inflation)) - 1

Inflation adjusted rate of return = ((1.10) / (1.04)) - 1

Inflation adjusted rate of return = 5.77%

4. Capital Needed at retirement = Annual Withdrawal * Present value annuity factor(5.77%,20 years)

Capital Needed at retirement = 135683.08 * (1 - (1 + Interest)^-Years) / Interest

Capital Needed at retirement = 135683.08 * (1 - (1.0577)^-20) / 0.0577

Capital Needed at retirement = 2351840.06 * (1 - 0.3257)

Capital Needed at retirement = 1585854.00