Question

Suppose you work as a financial planner and have a client, Ms. Vanessa Ives, who was born in 1980 and wants to retire at age 60. Mortality tables indicates that Ms. Ives should expect to live to age 85. Ms. Ives wants a fixed retirement income that has the same purchasing power at the time she retires as $50,000 has today (2018).(You understand that the real value of his retirement income will decline annually after she retires, but consider that her lifestyle changes will decrease her financial needs in a like manner as she gets older -- you believe her good health care plan and Medicare will take care of her medical costs without the need for extra draws on her retirement savings.

You plan his retirement payouts as follows:

Ms. Ives’ wants her retirement income will begin the day she retires, after which time she will receive 24 additional annual retirement payments from her retirement savings;

You anticipate 4% annual inflation from now until the time Ms. Ives retires;

She currently (beginning of 2018) has $90,000 saved in a retirement account that she will not draw from until retirement;

You expect Ms. Ives will be able to earn 8% annually on her retirement savings.

TASK:     [a] Create a timeline of Ms. Ives financial cash flows from now until she expires.

[b] Calculate how much must she save during each of the next 10 years (end-of-year deposits) to meet her retirement spending goals.

Answer 1

Year of Birth	1980		Time to retirement (yrs)	22
Year of retirement	2040		Actualtime ofinvesment	21	( as annuity required immidiately after retirement)
Year of Death	2065		Time to death(yrs)	47
Year of planning	2018		Retirement benefit(yrs)	25	(1+24)
Current need(annual)	$50,000.00		Retirement need ( annual)	$118,496
Inflation (annual)	4%		Return on invesment (annual)	8%
Annual annuity			118,496.00
Annual Interest Rate			8.00%
Annuity period			25.00
Principle annuity			1,481,200.00

	2018
year	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22		22	23	24	25	26	27	28	29	30	31	32	33	34	35	36	37	38	39	40	41	42	43	44	45	46	47
Cash flow	-90000	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	-20803.2	Total corpus created	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496	118496
FV(cash flow)	-453045	-96962.8	-89780.4	-83130	-76972.2	-71270.6	-65991.3	-61103	-56576.9	-52386	-48505.6	-44912.5	-41585.7	-38505.3	-35653	-33012.1	-30566.7	-28302.5	-26206	-24264.9	-22467.5	-20803.2

-ve indicates , investment amonut ( cash outflow) all calculation is made on 8% growth rate

answer b)

Here as investment done in end of year , so compounding interest earn will be 1 less than the actual time till retirement .

Retirement benefit reuired immidiately so, annuity will purchase one year before the retirement .

	year	Cash flow	FV(cash flow)
2018	1	-$90,000	-$453,045
	1	-$28,750.34	-$134,004
	2	-$28,750.34	-$124,078
	3	-$28,750.34	-$124,078
	4	-$28,750.34	-$114,887
	5	-$28,750.34	-$106,377
	6	-$28,750.34	-$98,497
	7	-$28,750.34	-$91,201
	8	-$28,750.34	-$84,445
	9	-$28,750.34	-$78,190
	10	-$28,750.34	-$72,398
	11		$0
	12		$0
	13		$0
	14		$0
	15		$0
	16		$0
	17		$0
	18		$0
	19		$0
	20		$0
	21		$0
			-$1,481,200