Question

Barry and Samantha are starting to take their retirement planning seriously. They are both 51 and plan to retire in 15 years at the age of 66. They expect to live 20 years in retirement (a life expectancy of 86). Between their 401k and IRA accounts they currently have $132,400 in retirement savings.

They currently have a combined income of $85,000 per year and expect to be able to live comfortably in retirement with 80% of their current purchasing power. They expect inflation to be 2.0% per year for the rest of their lives. They also expect to earn 10% per year on their investments, both now and in retirement.

Conduct an analysis of their retirement planning needs and provide them with a professionally written letter. Use the rubric provided when preparing the letter. In the letter and attached schedules provide information that answers the following questions. Please include a description of the relevant assumptions and any explanatory comments that make the results easier to understand.

PART 1

What amount of annual income will they need (after adjusting for inflation) in each of the twenty years of retirement to have the purchasing power of 80% of their current income?

PART 2

Assuming they will continue to earn 10% on their investments, how much money will they need to have in their retirement accounts when they retire so that it will provide the twenty years of income?

PART 3

Taking into account what they currently have in savings, how much will they have to save each month to meet their retirement needs?

PART 4

Sensitivity analysis: Redo the analysis assuming that they only earn 8% on their investments, instead of 10%. Determine the needed amounts so they have the money they need in retirement.

Answer 1

Dear barry and samantha,

Greetings of the day!!

It's great that you are started thinking and taken your retirement plan so seriously from real early that is before 15 years to retirement. But after doing some deep analysis of the retirement plan you have planned I want your attention to be drawn to certain aspects.

1. As you guys want your purchasing power of 80% of that of current scenario, the annual income you will be needing is as:

Current income 85000 80% 68000

Investment income 132400 10% 13240

Total 81240

If return on invt is 8% instead of 10%

current income 85000 80% 68000

Invt income 132400 8% 10592

Total 78592