Question

peter and her wife is 35 years old. they want to retire at 60. their estimated life expectancy is 90

peter have a stable job

their current annual income 650000 , and their annual expense are 617000

lump sum pension at retirement 320000

their want to maintain their living and spending after they retired

their current resources for investment 800000

the average inflation rate will be 3%(pre year) in the future

and the after tax investment return is 7%(pre year)

How much money they have to save for their retirement plan?Any investment plan/product establish for they to achieve their retirement goal? (400 words)

Answer 1

Given:

Current age of Peter and wife	35
Retirement age	60
Life expectancy	90
Annual income	650,000
Annual expenses	617,000
Net income per annum	33,000
Lump sum at retirement	320,000
Current investments	800,000
Inflation	3.0%
After tax investment return	7.0%

Solution:

Current investment	800,000
Investment when Peter and his wife are 60 or after 25 years 800,000*(1.07^25)	4,341,946
Lump sum retirement fund	320,000
Total amount available for investment excluding annual savings	4,661,946
Current annual expenses	617,000
Annual expense 25 years from now, that is when Peter and his wife is 60 617,000*(1.03^25)	1,291,861
After tax investment return	7.0%
Tax rate	3.0%
Real rate of return	4.0%
Amount required at the time of retirement 1,291,861/4%	32,296,525
Current investment and retirement fund after 25 years	4,661,946
Balance	27,634,578

Per annum savings required now to achieve this

Let per annum savings be X, then: XFVIFA7%,25 years = 27,634,578

X = 27,634,578/FVIFA7%,25 years

Where FVIFA at 7% for 25 years is 63.249 as per FVIFA tables, therefore X=27,634,578/63.249 or 436,197. As can be observed the same is more than the current annual savings of 300,000. Therefore, peter and his wife will have to save more, to maintain their current lifestyle.

To achieve their savings goal, Peter and his wife can look if suitable inflation adjusted annuity plan is available. Other options could be diversified mutual fund systematic investment plans, that will give a slightly higher return, while providing safety to their capital. Given they are relatively young, their risk-taking capacity is high. Given this, they can allocate a higher proportion of their investment in equity and gradually reduce the allocation, as they age.