Question

CASE PROBLEM: RETIREMENT PLAN Tim is 37 years old and would like to establish a retirement plan. Develop a spreadsheet model that could be used to assist Tim with retirement planning. Your model should include the following input parameters: Tim's current age = 37 years Tim's current total retirement savings = $259,000 Annual rate of return on retirement savings = 4% Tim's current annual salary = $145,000 Tim's expected annual percentage increase in salary = 2% Tim's percentage of annual salary contributed to retirement = 6% Tim's expected age of retirement = 65 Tim's expected annual expenses after retirement (current dollars) = $90,000 Rate of return on retirement savings after retirement = 3% Income tax rate postretirement = 15% Assume that Tim's employer contributes 6% of Tim's salary to his retirement fund. Tim can make an additional annual contribution to his retirement fund before taxes (tax free) up to a contribution of $16,000. Assume that he contributes $6,000 per year. Also, assume an inflation rate of 2%. Managerial Report Your spreadsheet model should provide the accumulated savings at the onset of retire- ment as well as the age at which funds will be depleted (given assumptions on the input parameters). As a feature of your spreadsheet model, build a data table to demonstrate the sensitivity of the age at which funds will be depleted to the retirement age and additional pre-tax con- tributions. Similarly, consider other factors you think might be important. Develop a report for Tim outlining the factors that will have the greatest impact on his retirement.

Answer 1

Savings Accumulation for retirement Amount contributed Current savings at to retirement by employer Gross savings contnibutio starting of the Savings at the at the end of end of the year the year Current sal ary ge 36 37 $145,000.00 S 8,700.00S 6,000.00 s 259,000.00 S 269,360.00 S 284,060.00 38 $147,900.0m 39 $150,858.00S 9,051.48 S 6,242.40 S 310,416.40 S 322,833.06 S 338,126.94 40 $153,875. 16 $ 9,232.51 $ 6,367.25 S 338,126.94 $ 351,652.01 S 367,25177 41 $156.952.66 $ 9,417.16 S 6,494.59 S 367,251.77 S 381,941.84 S 397,853.59 42 $160,091.72$ 9,605.50 s 6,624.48 S 397,853.59 S 413,767.74 S 429,997.73 43 $163,293.55$ 9,797.61 S 6,756.97 S 429,997.73 $ 447,197.64 $ 463,752.22 44 $166,559.42 $ 9,993.57 S 6,892.11 S 463,752.22 S 482,302.31 S 499,187.99 45 $169,890.61 46 S173,288.42 S10,397.31 S 7,170.56 S 536,378.90 S 557,834.06 S 575,401.92 47 $176,754. 19 s10,605.25 S 7,313.97 S 575,401.92 S 598,418.00 S 616,337.22 48 $180,289.27 S10,817.36 S 7,460.25 S 616.337.22 S 640,990.70 S 659,268.31 49 $183,895.06 $11,033.70 S 7,609.45S 659,268.31 S 685,639.04 S 704,282.19 50 $187,572.96 $11,254.38 S 7,761.64 S 704,282.19 S 732,453.48 S 751,469.50 51 $191,324.42 $11,479.47 S 7,916.87 S 751,469.50 S 781,528.28 S 800,924.62 52 $195,150.91 $11,709.05 $ 8,075.21 S 800,924.62 S 832,961.60 S 852,745.87 53 $199,053.93 $11,943.24 S 8,236.71 S 852,745.87 S 886,855.70 S 907,035.65 54 $203,035.01 S12,182.10 S 8,401.45 S 907,035.65 S 943,317.08 S 963,900.62 55 S207,095.71 S12,425.74 S 8,569.48 S 963,900.62 S1,002,456.65 S1,023,45187 56 5211,237.62 $12,674.26 S 8,740.87 S1,023,451.87 S1,064,389.94 S1,085,805.07 57 $215,462.37 $12,927.74 S 8,915.68 S1,085,805.07 $1,129,237.27|S1,151,080 70 58 $219,771.62 $13,186.30 S 9,094.00 $1, 151,080.70 $1,197,123.93 $1,219,404.22 59 $224,167.05 $13,450.02 S 9,275.88 $1,219,404.22 $1,268,180.39 S1,290,906. 29 60 5228,650.39 $13,719.02 S 9,461.40 S1, 290,906.29 $1,342,542.54 $1,365,722.96 61 $233,223.40 $13,993.40 $ 9,650.62 $1,365,722.96 $1,420,351.88 S1,443,995.91 62 $237,887.87 $14,273.27 S 9,843.64 $1,443,995.91 $1,501,755.74 S1,525,872.65 63 $242,645.63 $14,558.74 $10,040.51 $1,525,872.65 $1586,907.56 $1,611.506.80 64 $247,498.54 $14,849.91 S10,241.32 S1,611506.80 S1,675,967.08 $1,701,058 31 65l s252.44R. 51 I s15.146.91 s10.445. 15 I S1.701.058 31 In year 259,000.00 $ 8,874.00 S 6,120.00 S 284,060.00 S 295,422.40 S 310,416.40 $10,193.44 S 7,029.96 S 499,187.99 $ 519,155.51 S 536,378.90 $1.769.100.64Is1.794.693 70

At the end of the year 65 his total gross savings are $1794693.70.

From the age 66 onwards he has annual expenses of $90,000. He withdraws $90,000 annually from his savings. The income tax rate that applied on his withdrawal amount ($90,000) is 15%. This amount would be deducted from his savings. The rate of interest that would apply after his retirement on retirement fund is 3% annually.

A spread sheet model for depleted funds of Tim would be calculated.

Gross savings at the end of the year 90,000.00 $1,704,693.70 $ 1,691,193.70 $1,741,929.51 90,000.00 $1,651,929.51 $ 1,638,429.51 $1,687,582.39 90,000.00 $1,597,582.39 $ 1,584,082.39 $ 1,631,604.86 Savings at the start of the Savings after Expenses of Savings after expenses the current income tax deductions Age year 66 $ 1,794,693.70 $ 67 $1,741,929.51 $ 68 $1,687,582.39 $ 69 $ 1,631,604.86 $ 90,000.00 $1,541,604.86 $1,528,104.86 $1,573,948.01 70 $1,573,948.01 $ 90,000.00 $1,483,948.01$1,470,448.01 $ 1,514,561.45 71 $1,514,561.45 $ 72 $1,453,393.29 $ 73 $1,390,390.09 $ 90,000.00 $1,300,390.09 $1,286,890.09 $1,325,496.79 74 $1,325,496.79 $ 90,000.00 $1,235,496.79 $1,221,996.79 $1,258,656.70 75 $1,258,656.70 $ 76 $1,189,811.40 $ 77 $1,118,900.74 $ 78 $ 1,045,862.76 $ 90,000.00 $ 955,862.76 $ 942,362.76 $ 970,633.65 79 $ 970,633.65 $ 90,000.00 $ 880,633.65 $ 867,133.65 $ 893,147.66 80 $ 893,147.66 $ 81 $ 813,337.09 $ 82 $ 731,132.20 $ 83 $ 646,461.16 $ 90,000.00 $ 556,461.16 $ 542,961.16 $ 559,250.00 84 $ 559,250.00 $ 90,000.00 $ 469,250.00 $ 455,750.00 $ 469,422.50 85 $ 469,422.50 $ 90,000.00 $ 379,422.50 $ 365,922.50 $ 376,900.17 86 $ 376,900.17 $ 90,000.00 $ 286,900.17 $ 273,400.17 $ 281,602.18 87 $ 281,602.18 $ 90,000.00 $ 191,602.18 $ 178,102.18 $ 183,445.25 88 $ 183,445.25 $ 90,000.00 $ year 90,000.00 $1,424,561.45 $1,411,061.45 $1,453,393.29 90,000.00 $1,363,393.29 $1,349,893.29 $1,390,390.09 90,000.00 $1,168,656.70 $ 1,155,156.70 $1,189,811.40 90,000.00 $1,099,811.40 $ 1,086,311.40 $1,118,900.74 90,000.00 $1,028,900.74 $ 1,015,400.74 $1,045,862.76 90,000.00 $ 803,147.66 $ 789,647.66 $ 813,337.09 90,000.00 $ 723,337.09 $ 709,837.09 $ 731,132.20 90,000.00 $ 641,132.20 $ 627,632.20 $ 646,461.16 93,445. 25 $ 79,945.25 $ 82,343.60

The funds that are suffice for him up to the age 88. At age 89 he has only $82,343.60 dollars but he need at least $90,000 to sustain himself in the year 89.

Here Paying of income tax is a big concern for the retired people. If the government waives the income tax for the retired people, then Tim will have sufficient funds to sustain few more years.

Excluding the income tax deductions a spreadsheet model prepared and the following are the calculations.

If no tax Savings atthe Bxpenses of the current year Savings after Gross savings income tax deductions ded uctions, the Savings after Jexpenses at the end of the year start of the amountin his Income tax deductions Age 66 S 1,794,693.70 S 67 $1,741,929.51 S 68 $1,687,582.39 |S 90,000.00 S1597,58239 $1,584,082.39 $1,631,604.85 S 13,500.00 69 $1,631,604.86 S 70$1573,948.01 S 71 S1,514,56145 S year account 90,000.00 51,704,693.70 $1,691,193.70 51,741,929.51 S 13,500.00os 1,704,693.70 90,000.00 51,651,929.51 $1,638A29.51 51,687,582.39 S 13,500.00os 1,663,134.51 s 1620,328.54 90,000.00 5 1,541,604.86 S1,528,104.85 S1,573,948.01 S 13,500.00 S 1,576,238.40 90,000.00 51483,948.01 $1470,448.01 51,514,561.45 S 13,500.00os 1,530,825.55 90,000.00 S1424,56145 51411,061.45 $1,453,393.29 S 13,500.00 S 1484,050.32 90,000.00 $1,363,393.29 51,349,893.29 $1,390,390.09 S 13,500.00S 1435,87183 90,000.00 S1,300,390.09 $ 1,285,890.09 51,325,495.79 S 13,500.00o $ 1385,247.98 72 $1453,393.29 $ 73 51,390,390.09 |S 74 $1325,496.79 S 90,000.00$1235,496.79 S1,221,996.79 $1,258,655.70 S 13,500.00 $ 1,335,135.42 90,000.00 5 1,168,656.70 S1,155,156.70 S1,189,811.40 s 13,500.00 S 1,282,489.48 90,000.00 5 1,099,81140 S1,086,311.40 5 1,118,900.74 s 13,500.00 $ 1,228,264.17 90,000.00 51,028,900.74 $1,015,400.74 51,045,562.75 S 13,500.00os 1172,41209 75 $1,258,656.70 s 76 $1,189,811.40 S 7 51,118,900.74 |5 78 $1,045,862.76 5 90,000.00S 555,562.75 S 942,36276 5 970,633.65 S 13,500.00 $ 1114,884.45 79 s 970,633.55 S 80 S 893,147.66 S 81 S 813,337.09 |5 82 S 731,132.20 S 90,000.00 s 880, 633.65 5 B67,133.65 S 893,147.66 S 13,500.00 S 1055,630.99 90,000.00 S 303,147.66 S 789,647.65 5 813,337.09 S 13,500.00 S 90,000.00 S 723,337.09 5 709,837.09 S 731,132.20 S 13,500.00 S 90,000.00 s 641,132.20 s 627,632.20 s 645,461.16 S 13,500.00 S 90,000.00 5 56,451.15 $ 542,961.16 5 559,250.00 S 13,500.00 S 90,000.00 S 459,250.00 S 455,750.00 S 459422.50 S 13,500.00 S 994,599.92 931,737.92 866,990.05 835 646,461.16 |5 84 $ 559,250.00 S 85 $ 459,422.50 $ 90,000.00S 379,422.50 S 365,922.50 5 376,900.17 S 13,500.00 S 86 S 376,900.17 |S 87 S 281,602.18 S 88 $ 183,445.25 5 90,000.00 S B00,299.76 731,608.75 660,857.01 90,000.00 5 285,900.17 $ 273,400.17 5 281,502.18 S 13,500.00 S 90,000.00 s 191,602.15 5 178,102.18 $ 183,445.25 s 13,500.00 s 79,945.25 S 587,98272 512,922.20 93,445.25 5 82,343.60 S 13,500.00 S 435,609.87 82,343.60 S 90,000.00 Total $310,500.00 $ 355,978.16 90 273,957.51 91 189,476.23 102,460.52 92 93 12,834.34

Basing on this model, Tim will lead comfortably up to the age 93.The funds at the age of 94 is $12,834.34