Question

Donna, a registered nurse, earns $50,000 annually. She is 30 years old (date of birth is April 30, 1990) and her plans are to get married, raise a family and continue to work because she likes her job and enjoys the financial freedom. She is planning to retire at age 67 at which time she expects to receive Social Security retirement benefits and her own retirement benefits that she hopes to be able to accumulate between now and her retirement age. Her target retirement income replacement ratio for when she starts retirement is at least to have 90% of her last year’s salary. She expects to earn 9% on her investments during her working years and believes that her current annual income will kept pace with inflation during her working years. She estimates that inflation will average 3% annually between now, her retirement, and after into retirement. Assume that currently Donna has no other sources of retirement income and plans to use an Individual Retirement Account, until she is able to obtain a better job which has a 401 (k) investment plan sometime in the future.

1. If her salary increases at 3% annually until she retires, what is her expected annual salary at  

Age 67? $____________________.

2. What is Donna’s estimated monthly and annual income expected from Social Security based upon the Social Security website using the quick calculator at www.ssa.gov/OACT.

Use inflation adjusted dollars in the Social Security Estimates.

Monthly Social Security retirement benefit at age 67$______________

Annual Social Security retirement benefit at age 67$______________.

3. What percentage of her final year’s annual income will Social Security replace, if she begins Social Security benefits

At age 67___________%

d) How much additional annual income in retirement is needed per year in retirement to meet the 90% replacement ratio that she would like to achieve?   

              At age 67 $______________________

e)    What total investment portfolio amount does she need at age 67 in order to produce her desired 90% income replacement for the rest of her life in retirement?

Required Investment Portfolio Amount needed at retirement age 67?   _______________

Donna currently does not have a retirement plan at work and her retirement income from Social Security is all she currently has. How per month does she need to start saving for retirement to reach the needed investment portfolio amount, what type of retirement account and what types of investments should she use in order to reach her goal of 90% income replacement in retirement for retiring at age 67?

Be specific in your recommendations.

Answer 1

a. If her salary increases at 3% annually until she retires, what is her expected annual salary at

Age 67? $ 149261.3.

The compound interest formula is ((P*(1+i)^n) - P), where P is the current salary, i is the annual inflation rate, and n is the number of periods.

a. What is Donna’s estimated monthly and annual income expected from Social Security based upon the Social Security website using the quick calculator at www.ssa.gov/OACT.

Use inflation adjusted dollars in the Social Security Estimates.

Monthly Social Security retirement benefit at age 67 $ 6,421

Annual Social Security retirement benefit at age 67 $ 77,052.

a. What percentage of her final year’s annual income will Social Security replace, if she begins Social Security benefits

At age 67 51.62%

Annual Salary at Retirement	149,261.33
Socuial Security Benefit	77,052.00
% of Annual Salary	51.62

d) How much additional annual income in retirement is needed per year in retirement to meet the 90% replacement ratio that she would like to achieve?

At age 67    $ 57,283

90% of Annual Salary	134,335.20
Received from Social Security	77,052.00
Additional inccome in retirement	57,283.20

Required Investment Portfolio Amount needed at retirement age 67?  $ 636,480

Additional inccome in retirement	57,283.20
Return on Investment	9%
Investment Required	636,480.01