In: Accounting
Jordan, age 46, currently makes $143,000. She expects that inflation will average 2.75 percent for her entire life expectancy. She expects to earn 8.5 percent on her investments and retire at age 65 and live to age 92. She has sent for and received her Social Security benefit statement, which indicated that her Social Security retirement benefit in today’s dollars adjusted for early retirement is $20,000 per year. It is reasonable to subtract the Social Security benefit from today’s needs because it is inflation adjusted.
Using the basic annuity method, calculate the amount of capital Jordan will need at retirement. Assume that she wants to receive her annual retirement income at the beginning of each year (annuity due).
Answer:
Calculation of the amount of capital Jordan will need at retirement according to the capital preservation method
Annual income = $ 143,000
Current Age = 46 years
Retirement age = 65 years
Total life expectancy age = 92 years
Social security for early retirement = $ 20,000 per year
.
Amount of capital required at time of retirement to finance for post retirement = [ $ 143,000 * ( 92 - 46 ) ] - [ $ 143,000 * ( 92 - 65 ) ]
Amount of capital required at the time of retirement to finance for post retirement = $ 6,578,000 - $ 3,861,000 = $ 2,717,000
Total amount of capital required by Jordan at the time of retiring before adjusting for inflation = $ 2,717,000
Total amount of capital required by Jordan at the time of retiring after adjusting for inflation = $ 2,717,000 * ( 2.75 ) * ( 46 - 27 )
Total amount of capital required by Jordan at the time of retiring after adjusting for inflation = $ 2,717,000 * ( 2.75 ) * 19
Total amount of capital required by Jordan at the time of retiring after adjusting for inflation = $ 141,963,250
.
Therefore the total amount required by Jordan at the time of retirement after inflation adjustment = $ 141,963,250
Social security benefit = $ 20,000 * ( 92 - 65 ) = $ 540,000
Total amount required by Jordan after providing for Inflation adjusted Social security benefit = $ 141,963,250 - $ 540,000
Total amount required by Jordan after providing for Inflation adjusted Social security benefit = $ 141,423,250.