Question

Eugene and Karen want to retire in 20 years. Both make good money, and want to put aside enough funds for a comfortable retirement. Their current household expenditures (excluding savings) are about $75,000 a year, and they expect to spend about 125% of that in retirement (125% equals a multiplier factor of 1.25.) They estimate their combined Social Security benefits will equal $20,000 a year in today’s dollars and that they’ll receive another combined $35,000 yearly from their company pension plans. They believe future inflation will be about 3% a year, that they’ll be able to earn about 12% on their investments before retirement, and about 8% afterward. Determine how big their investment nest egg will have to be and how much they’ll have to save yearly to accumulate the needed amount within the next 20 years.

PROJECTING RETIREMENT INCOME AND INVESTMENT NEEDS
Name(s)			Eugene & Karen				Date
I.	Estimated Household Expenditures in Retirement:
	A.	Approximate number of years to retirement
	B.	Current level of annual household expenditures, excluding savings							$
	C.	Estimated household expenses in retirement as a percent of current
		expenses									%
	D.	Estimated annual household expenditures in retirement (B × C)							$ -
II.	Estimated Income in Retirement:
	E.	Social security, annual income							$
	F.	Company/employer pension plans, annual amounts							$
	G.	Other sources, annual amounts							$
	H.	Total annual income (E + F + G)							$ -
	I.	Additional required income, or annual shortfall (D - H)							$ -
III.	Inflation Factor:
	J.	Expected average annual rate of inflation over the period to retirement									%
	K.	Inflation factor (in Appendix A):				Based on		years to
		retirement (A) and an expected average
		annual rate of inflation (J) of
	L.	Size of inflation-adjusted annual shortfall (I × K)							$ -
IV.	Funding the Shortfall:
	M.	Anticipated return on assets held after retirement									%
	N.	Amount of retirement funds required—size of nest egg (L ÷ M)							$ -
	O.	Expected rate of return on investments prior to retirement									%
	P.	Compound interest factor (in Appendix B):
		Based on		years to retirement (A) and an expected rate of return
		on investments of
	Q.	Annual savings required to fund retirement nest egg (N ÷ P)							$ -
Note: Parts I and II are prepared in terms of current (today’s) dollars.

Answer 1