Question

Mr. and Mrs. Lee are both 40 years old and they approach you, a wealth manager, for advice on their retirement planning. These are the information about the couple :
Age           : Both are 40; No children
Jobs           : Civil Engineer for Mr. Lee; Administration Manager for Mrs. Lee
Target retirement age   : 60 years old (for both)
Life expectancy   : 90 years old (for both)
Annual income    : $540,000 (after tax) for Mr. Lee
           $450,000 (after tax) for Mrs. Lee
Monthly expenses   : $32,000 for Mr. Lee
           : $23,000 for Mrs. Lee
Investment       : Total investment in mutual funds (mix of bonds and stocks)
           $1,000,000
           (average annual return : 7%)
Cash on hand       : Total $500,000
Apartment       : No apartment since they may go back to Australia to join their family after retirement.
Monthly expenses   : Expected to be 70% of their current level after retirement

a.  Estimate the amount of retirement fund they should have at the retirement age of 60

b. explain the underlying concepts and assumptions in your calculation.(300 words)

Answer 1

Retirement planning is important because it is the determining factor of your satisfaction with your lifestyle post retirement. Financial planning is crucial because it identifies your sources of income and expenses and establishes your retirement budget, based on your personal plan.

Couple of reasons why this is very crucial in the current scenario:

· The average life expectancy continues to rise

· There is an age factor only till then we can work and earn from working.

· Contingency and unpredictability: Future may have more financial obstacles than past or present.

· Reliance on Social security or the Pension funds is limited support and is risky.

· Family dependency.

Key factors for the Retirement planning is the assessment of monthly/annual expenses, assessment of age limits – earning, retirement, expected life; These are critical to evaluate the “Corpus”. Retirement “Corpus” is a fund pool, which is computed based on the current and expected expenses to be borne post retirement and this fund is required to satisfy the living style based on the expense structure;

Many other factors like Rate of Return on the Corpus investment, Inflationary trends, Tax costs, etc are required to be kept in mind while assessing; Once the Corpus fund is assessed, it is important to plan from the current earning to save the funds on periodic basis to reach the Corpus at the point of time of Retirement.

Apart from the given factors in case of Mr and Mrs Lee, have considered the below assumptions to compute the Corpus;

Inflation in Australia: 1.43% in 2020 (showing a down trend of 1.9% during 2017 to 1.43% during 2020); Assumed 1.75% for these calculations.

Tax Cost: Based on the Income Tax slabs, have considered average of 20% tax for Mr and Mrs Lee, applicable post retirement;

Assumed Rate of Return post retirement as well at 7% for this computation

Current Age	40
Expected Retirement Age	60
No.of Years to Retirement	20
Life Expectancy	90
No.of Years post Retirement	30
Rate of Return during Accumulation	7%
Rate of Return after retirement	7%
Rate of Return after retirement Post Tax	5.60%
Inflation Rate	1.75%
Inflation Adjusted Return	3.8%
Current Monthly Expenses	55,000
Expeced Monthly Expenses post retirement	38,500
Inflation Rate	1.75%
No.of Years to Retirement	20
Expense at Retirement	55,422	(38500*(1+1.75%)^(20+1))
Pre-Tax monthly Pension needed	69,278	(55422/(1-20%))
Total Corpus Required:
Monthly expense at Retirement	69,278
No.of years after retirement	30
Inflation Adjusted Return	3.78%
Corpus required at Retirement	1,89,94,179	PV((1+3.78%)/(1+1.75)-1,30,-69278*12,0,1)
Investment so far in place	10,00,000	Cash not considered as Investment
Rate of Return on this	7.00%
This amount at the time of Retirement	38,69,684	(10,00,000*(1+7%)^20)
Net Corpus to be saved	1,51,24,494
Monthly Savings required to reach Corpus	21,308	(15124494*7%/(12*(1+7%)*(1+7%)^20))