Question

Use the following information to answer questions 6-9.

Brent and Sharon are getting close to retirement and want to make sure they are on track for a comfortable lifestyle. They want to retire in 10 years. They currently make $120,000 per year in gross income. They pay FICA taxes of $9,180 per year; have commuting expenses of $2,000 per year, Uniform expenses (inc. dry cleaning) of $1,200 per year, a monthly mortgage payment of $950 per month and will be paid off in 10 more years. They eat lunch out at work often which runs $1,300 per year. They anticipate some expenses will increase during retirement: Medical insurance will increase by 6,000 per year, travel expenses will increase by $5,000 per year, and hobby expenses will increase by $4,000 per year. They currently save $12,000 per year. Brent has a defined benefit pension plan at work that will pay him $2,000 (in today’s dollars) each month and adjusts for inflation each year.

6.) What is their current annual wage replacement need for retirement in today’s dollars?

a.) $73,920

b.) $84,370

c.) $93,370

d.) $97,920

e.) Some other amount. (indicate the amount here ____________________________)

7.) What is their annual retirement need when they start retirement 15 years from now? In other words, how much will they need to withdraw from their retirement account each year to fund their retirement 15 years from now? Assume inflation averages 2.5% per year.

a.) $141,817

b.) $137,472

c.) $135,228

d.) $122,193

e.) $107,058

8.) Assuming inflation averages 2.5% and their investment rate of return is 9% per year, and they expect to live 25 years in retirement. How much will they need in their retirement accounts when they retire in 15 years from now?

a.) $6,554,942

b.) $2,719,865

c.) $1,409,299

d.) $1,325,258

e.) $1,081,454

9.) Assume they have already saved $300,000 in their retirement accounts. How much more do they need to save on an annual basis (at the end of each year) to reach their goal?

a.) $17,764

b.) $13,269

c.) $12,193

d.) $10,781

e.) $9,891

Answer 1

Retire in 10 years

gross income $120,000 per year

FICA taxes of $9,180 per year

commuting expenses of $2,000 per year

Uniform expenses (inc. dry cleaning) of $1,200 per year,

a monthly mortgage payment of $950 per month = 11400 and will be paid off in 10 more years.

They eat lunch out at work often which runs $1,300 per year.

they currently save $12,000 per year.

Brent has a defined benefit pension plan at work that will pay him $2,000 (in today’s dollars) each month and adjusts for inflation each year.

After retirement

Medical insurance will increase by 6,000 per year,

travel expenses will increase by $5,000 per year, and

hobby expenses will increase by $4,000 per year.

They expand 82920 on recurring expenses

When included the increased expenses the current annual wage replacement need retirement in today’s dollars is 82920+ 6000+ 5000+ 4000= 97920.

6) current annual wage replacement is $97920 (d).

7) annual retirement need when they start retirement 15 years form now

       After inflation of 2.5% p.a for 15 years the annuity is 0.690466 and the present value is 97920/0.690466= $141817 (a).

8) retire in 15 years and retirement for 25 years. Inflation rate is 2.5%. Investment rate of return is 9%.

Real discount rate is 1+.09/1+.025-1=.063415

the amount need for the retirement of 25 years is 1409299 (c)

9) they need to save 12193 for each year (c)