Question

Consider the case of Mike. He is just about to turn 62 years of age and he has come to you to help him determine if/when he can retire. Mike has provided you with the following information: His current earnings are $100,000 annually He used a “Top Down” retirement assessment and determined that his retirement cash needs would be equal to his annual earnings less his FICA tax (7.65%), his mortgage of $1320/month, and $5,000 per year of business/work related expense. He does estimate that each year he waits to retire, his cash flow needs will increase by 2%. Once he is retired, he should experience stable cash flows. He currently has $425,000 in his retirement account. He believes he should be able to earn a 6% rate of return on his retirement account. His Social Security statement indicates he should receive a payment of $2,685 per month at his full retirement age (FRA) of 67. He is aware that his social security payments are reduced if he starts taking payments early, and they will increase if he defers taking social security payments after age 67. Mike expects to live until age 95. He is interested in using an annuity method of capital needs analysis. Considering this fact pattern, Mike wants to know the following: 1. Can he afford to retire now, at age 62, based on his current retirement account value, reduced social security and cash flow needs? 2. Can he afford to retire at his FRA of 67? If he is short of capital, how much would he have to save each year to meet his goal? 3. Can he afford to retire if he waits until age 70? If so, how much cash flow could he have if he used a Capital Preservation strategy and assumed his 6% rate of return is sustainable?

Answer 1

Please note that all calculations are done on annual basis unless otherwise mentioned

Retirement Cash Needs - Age 62
Annual Income	100000
Less : FICA Tax	7650
Less : Mortgage	15840
Less : Business/work Related Expenses	5000
Retirement Cash Needs	71510

We assume Social security payment receipt will be reduced/increased by 2% every year for early/late retirement respectively.

Statement Showing Cash needs & Social security payment receipt at different age :-

Retirement Age	Cash Flow Need	Social Security Payment Receipt
62	71510	29,182.65
63	72940.2	29,766.30
64	74399.004	30,361.63
65	75886.98408	30,968.86
66	77404.72376	31,588.24
67	78952.81824	32,220.00
68	80531.8746	32,864.40
69	82142.51209	33,521.69
70	83785.36234	34,192.12

Case 1) If he retires at the Age of 62

Statement Showing Fund Value at various age:-

Age	Opening Fund Value	Earning on Fund	Socail Security Payment	Cash Flow Need	Closing Fund Value
62	425000	25500	29,182.65	71510	4,08,172.65
63	4,08,172.65	24490.3588	29,182.65	71510	3,90,335.65
64	3,90,335.65	23420.13913	29,182.65	71510	3,71,428.44
65	3,71,428.44	22285.70628	29,182.65	71510	3,51,386.79
66	3,51,386.79	21083.20746	29,182.65	71510	3,30,142.65
67	3,30,142.65	19808.55871	29,182.65	71510	3,07,623.85
68	3,07,623.85	18457.43103	29,182.65	71510	2,83,753.93
69	2,83,753.93	17025.2357	29,182.65	71510	2,58,451.81
70	2,58,451.81	15507.10864	29,182.65	71510	2,31,631.57
71	2,31,631.57	13897.89396	29,182.65	71510	2,03,202.11
72	2,03,202.11	12192.1264	29,182.65	71510	1,73,066.88
73	1,73,066.88	10384.01278	29,182.65	71510	1,41,123.54
74	1,41,123.54	8467.412352	29,182.65	71510	1,07,263.60
75	1,07,263.60	6435.815895	29,182.65	71510	71,372.06
76	71,372.06	4282.32365	29,182.65	71510	33,327.03
77	33,327.03	1999.621871	29,182.65	71510	-7,000.70

Since Mike will run out of fund at age of 77, he can not afford to retire at the age of 62.

Case 2) Retirement at the age of 67

Statement Showing Fund Value at various age:-

Age	Opening Fund Value	Earning on Fund	Socail Security Payment	Cash Flow Need	Closing Fund Value
67	552500	33150	32,220.00	78,952.82	5,38,917.18
68	5,38,917.18	32335.03091	32,220.00	78,952.82	5,24,519.39
69	5,24,519.39	31471.16367	32,220.00	78,952.82	5,09,257.74
70	5,09,257.74	30555.46439	32,220.00	78,952.82	4,93,080.39
71	4,93,080.39	29584.82316	32,220.00	78,952.82	4,75,932.39
72	4,75,932.39	28555.94346	32,220.00	78,952.82	4,57,755.52
73	4,57,755.52	27465.33097	32,220.00	78,952.82	4,38,488.03
74	4,38,488.03	26309.28173	32,220.00	78,952.82	4,18,064.49
75	4,18,064.49	25083.86954	32,220.00	78,952.82	3,96,415.54
76	3,96,415.54	23784.93262	32,220.00	78,952.82	3,73,467.66
77	3,73,467.66	22408.05948	32,220.00	78,952.82	3,49,142.90
78	3,49,142.90	20948.57396	32,220.00	78,952.82	3,23,358.66
79	3,23,358.66	19401.5193	32,220.00	78,952.82	2,96,027.36
80	2,96,027.36	17761.64137	32,220.00	78,952.82	2,67,056.18
81	2,67,056.18	16023.37075	32,220.00	78,952.82	2,36,346.73
82	2,36,346.73	14180.80391	32,220.00	78,952.82	2,03,794.72
83	2,03,794.72	12227.68305	32,220.00	78,952.82	1,69,289.58
84	1,69,289.58	10157.37493	32,220.00	78,952.82	1,32,714.14
85	1,32,714.14	7962.848337	32,220.00	78,952.82	93,944.17
86	93,944.17	5636.650143	32,220.00	78,952.82	52,848.00
87	52,848.00	3170.880057	32,220.00	78,952.82	9,286.06
88	9,286.06	557.1637661	32,220.00	78,952.82	-36,889.59
89	-36,889.59	-2213.375502	32,220.00	78,952.82	-85,835.79
90	-85,835.79	-5150.147127	32,220.00	78,952.82	-1,37,718.75
91	-1,37,718.75	-8263.125048	32,220.00	78,952.82	-1,92,714.69
92	-1,92,714.69	-11562.88165	32,220.00	78,952.82	-2,51,010.39
93	-2,51,010.39	-15060.62364	32,220.00	78,952.82	-3,12,803.84
94	-3,12,803.84	-18768.23015	32,220.00	78,952.82	-3,78,304.88
95	-3,78,304.88	-22698.29305	32,220.00	78,952.82	-4,47,736.00

Hence, Mike can not afford to retire at the age of 67. If he wish to retire at the age of 67, he needs to save additional $13,830 per year approxmiately

Case 3) If he retires at the age of 70

Age	Opening Fund Value	Earning on Fund	Socail Security Payment	Cash Flow Need	Closing Fund Value
70	629000	37740	34192.12176	83785.36234	617146.7594
71	617146.7594	37028.80557	34192.12176	83785.36234	604582.3244
72	604582.3244	36274.93946	34192.12176	83785.36234	591264.0233
93	71947.14831	4316.828899	34192.12176	83785.36234	26670.73664
94	26670.73664	1600.244198	34192.12176	83785.36234	-21322.25974
95	-21322.25974	-1279.335584	34192.12176	83785.36234	-72194.8359

Mike can not afford to reitre at 70. All year calculations are not shown due to character limit