Donald, age 40, earns $95,000 annually; his wage replacement ratio has been determined to be 70%....
Donald, age 40, earns $95,000 annually; his wage replacement ratio has been determined to be 70%. He expects inflation will average 3% over his entire life expectancy. He expects to work until 67, and live until 95. He anticipates a 7.5% return on his investments. Donald does not expect to receive any Social Security retirement benefits.
1. Calculate Donald’s annual retirement needs in today’s dollars.
a. $29,000. b. $55,000. c. $66,500. d. $95,000. e. $105,500
2. What is the amount of Donald’s first retirement distribution at age 67?
a. $110,825.08. b. $143,576.36. c. $147,715.72. d. $210,981.86. e. $235,788.15
3. Calculate Donald’s capital needed at retirement age 67.
a. $1,709,569.80. b. $1,837,787.53. c. $2,359,975.87. d. $2,463,081.61. e. $2,678,018.16
Homework Answers
1. Donald's annual retirement needs in today's dollars is $95,000X70%=$66,500 i.e. Option c.
2. Donald's first retirement distribution at age 67 is (67-40)=27, i.e. 66500(1+3%)^27=$147,715.72 i.e. Option c.
3.
| Age | 67 | 68 | 69 | 70 | 71 | 72 | 73 | 74 | 75 | 76 | 77 | 78 | 79 | 80 | 81 | 82 | 83 | 84 | 85 | 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | Total |
| Distribution wrt age in $ | 147715.72 | 152147.2 | 156711.6 | 161413 | 166255.3 | 171243 | 176380.3 | 181671.7 | 187121.9 | 192735.5 | 198517.6 | 204473.1 | 210607.3 | 216925.5 | 223433.3 | 230136.3 | 237040.4 | 244151.6 | 251476.1 | 259020.4 | 266791 | 274794.8 | 283038.6 | 291529.8 | 300275.6 | 309283.9 | 318562.4 | 328119.3 | 337962.9 | |
| Considering return @7.5% total capital required | 141532.3 | 135607.7 | 129931.1 | 124492.1 | 119280.8 | 114287.6 | 109503.5 | 104919.6 | 100527.7 | 96319.52 | 92287.54 | 88424.34 | 84722.86 | 81176.32 | 77778.24 | 74522.41 | 71402.87 | 68413.91 | 65550.07 | 62806.11 | 60177.02 | 57657.98 | 55244.39 | 52931.84 | 50716.09 | 48593.09 | 46558.96 | 44609.98 | 2,359,975.87 |
Option c.
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