Question

How much should I save at the beginning of every month for retirement? I want to provide myself with increasing income starting at age 60 lasting to age 95, replacing 100% of my current income.

Assumptions:

Current age 30

Inflation 2.5%

Projected return before retirement 8%

Projected return after retirement 6%

Current income $50,000

Estimated Social Security $20,000

Wage Replacement Ratio 100%

Current Retirement Accounts $10,000

Answer 1

Given Information: Current Age at Time 0= 30 ,retirement at = 60, Current income $50000

If I want to same income as of now at the age of 60 that means I need the income having same purchaing power at it is now.

So to calculate the Future Income by taking infaltion 2.5% and time 30 year

= 104878.38 Value of Future Annual income

Now we need the amount that to invest or that be accumulated at Age of 60 so that we will get $104878.38 every year till age of 95.

Here assuming 1st payment to be due at Time 60 i.e. starting of the year 61.

So calculate 104878.38+104878.38 x Cumulative discount factor @ 6% for 35 years =

You can also get this simple with Texas BA 2 Finacial calculator by putting values =

N=34. I/Y=6, FV=0, PMT= 104878.38 Compute PV you will get 1506907.37

and Add 104878.38 more as we took N 34 year and payment start at Time beggining 61. So

1506907.37+104878.38 = 1611785.75

So we nned accumulated balance of $ 1611785.75 at T60. Apart from this we have expected social security $20000 to be receive at T60 and we have $10000 in account at T0 which will grow at 8%

So Net ammount we needed is

Accumulated balance needed = 1611785.75

Less: Social security = $20000

Less: future value of Current

retirement account = 100626.57

Net mount required = 1491159.18

Calculation of monthly saving required to accumulate $1491159.18

First we need to calculate monthly rate of 8% with equation :

=0.643403% per month

Now calulate monthly saving required N= 30*12=360

Put values at Texas BA II calculator as N=360, I/Y= 0.643403,  PV=0, FV= 1491159.18

compute PMT = 1058.65

So monthly saving required $1058.65

Please comment if any further clarification needed.