Question

Introductory data:Julia Gupta is 40 years old and has never married. She wants to retire at age 62 with an 80% wage replacement ratio. Julia currently earns $100,000 as an employee and has managed to save $100,000 toward her retirement goal (including investment assets and cash equivalents). She is currently saving $5,000 per year in her 401(k) plan. Her employer’s plan calls for a 50% match for contributions.Financial goal:Julia’s primary goal is to retire at age 62 with an 80% wage replacement, including Social Security, projected to be $30,000 in today’s dollars at normal retirement age of 67. She wants to plan for a life expectancy to age 95.

Economic and investment information

1. General inflation is expected to average 3.0% annually for the foreseeable future.
2. Julia’s expected investment portfolio rate of return is 8.5%.
3. Julia’s marginal income tax rate is 25%.
4. Social Security Tax is 7.65%.

Requirements:Please submit no more than five pages of the analysis, including references, tables, and graphs. In your analysis, please include as detailed as possible, including calculation steps. One submission per group. Please note: If any groups/individuals have the same report, both will earn zero credit. The analyses depends on your assumptions, so there are no absolutely right answers. Please design a financial plan to meet her financial goal.Do you think ($5,000 saving + employer’s contribution) matches her goal

• If not, how to make adjustment? Please consider the following scenarios:
  • Should she save more per year before retirement?
  • Should she delay retirement?

Answer 1

1. Julia Gupta is 40 years old. Age of retirement is 62 and life expectancy is around 95 years. Which means, there are 22 years to her retirement and 33 years of her life after retirement.

Current earnings of July is $100000 per anum. She is aiming for 80% wage replacement.

General inflation is 3% annually.

2. Hence her income after 22 years should be 191610.34, (100000 plus 3% every year to meet the inflation needs).

Income tax rate is 25%. Hence Income on hand would be 143707.755.

After retirement, she is expecting 80% of her current income i.e. (143707.755*80%)= 114966.204

3. Her current savings is 5000 per month and her employer plans to contribute 50% of her contribution = $ 7500.

Thus 7500*22= $165000 plus she has saved $100000 so her total savings would be $265000, which would be 136000 short from her plan to save 401000.

Hence it would be better if she keeps on working for more 3 years 10 months to accumulate 136000 (136000/3000)=46 months.

4. But even after working for this time, she would only be able to earn $34085 (401000 *8.5% of 401000) after investing the entire amount and $27705 (30000-7.65% of 30000) as social security after the age of 67 which would total to $61790.

Which means, there would still be a shortfall from her goal earnings of $ from pt.2 (114966.204-61790) = $ 53176.204, for which she would have to work for 18 more months.

5. Hence 1 year 6 months more of employment would help her reach to her desired goal.

So, she would be able to attain her desired goal of earnings by working till the age of:

62 years

(+) 3 years 10 months (pt.3)

(+)1 year 6 months (pt.4)

Total: 67 Years 4 months. But maximum retirement age is 67 years hence she should either work till that age or invest extra amount till the age of 62 years.

6. If he saves around 25000 per anum and receives 50% contribution from her boss then she would be able to save 37500 per year for 22 years = 37500*22= $825000 + already saved ($100000) = $ 925000.

It would give her $78625 of return (925000*8.5% of 925000), which, including social security of $27705 would equal to $ 106330, which would almost equal her desired return.

Hence, to get her desired amount of return after retirement, she either has to work till the age of 67 years with savings of $ 5000 per year or save $ 20000 extra per anum to retire at the age of 62.