Question

Part 5: Supplementing Prof. Business’ Retirement Savings. Prof. Business realizes she is entering the last third of her career and is considering retirement in 10 years. She is in a self-managed defined contribution pension plan and through automatic payroll deduction and University matching both based on mandated percentages of her salary $1350/month is currently deposited into her pension plan. Due to the lack of recent raises at her public university, she doesn’t plan on these monthly contributions increasing much if any over the next 10 years. Prof. Business currently has $545,000 in her pension plan account and is somewhat concerned if this along with her mandated future $1350 monthly deposits will adequately fund her retirement in 10 years. She is considering supplementing her pension plan by having automatic additional monthly deposits deducted into a 403c retirement plan which is like a 401k plan for employees of non-profit organizations like public universities. She is comfortable that this 403c plan since it has the same investment management companies and investment options as her current pension plan and it also has a Roth option where she won’t get a tax break for her deposits but her retirement withdrawals will be tax free. Prof. Business has a monthly deposit amount in mind, but wants your help in trying to figure out if this amount will be adequate. Given her current pension plan portfolio investment mix, she estimates a nominal annual expected return of 7.8% which translates to a 0.65% monthly expected return. 1. Prof. Business is considering having $900/month, which is about 10% of her monthly gross (pre-tax) salary deducted and deposited into the 403c for the next 10 years. This is addition to the $545,000 already in her pension plan today and the estimated $1350 monthly deposits into her current pension plan. What is the expected total value of Prof. Business’ retirement accounts after making end of the month deposits of $2250 for 10 years on top of her current retirement savings of $545,000 at her expected monthly return? 2. Prof. Business estimates she will live for 25 years after her planned retirement in 10 years and wants a monthly retirement annuity with the withdrawals at the end of each month once she retires. What is her expected monthly retirement income using your answer from #1 and assuming she will continue to earn her expected monthly return after retirement? 3. Upon hearing the amount of this monthly retirement annuity, Prof. Business is happy with this figure because it’s higher her current pre-tax income. However, she wonders if her expected monthly investment return is too optimistic and wants to change it to a 6% nominal annual rate, or 0.5% per month after retirement, but a 7.2% nominal annual rate, or 0.6% before. Also, she wants a monthly income of $10,000 once she retires (for 25 years). How much extra above her estimated mandated $1350 monthly pension plan amount would Prof. Business need to deposit monthly into the 403c plan over the next 10 years to fund this retirement income goal?

Answer 1