Question

Prof. Business realizes she is entering the last quarter of her career and is considering retirement in 8 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 $1300/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 8 years. Prof. Business currently has $700,000 in her pension plan account and is somewhat concerned if this along with her mandated future $1300 monthly deposits will adequately fund her retirement in 8 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 7.2% which translates to a 0.6% monthly expected return.

Prof. Business feels like the required 403c monthly deposit is too much of a financial stretch for her and wants you to re-figure her potential monthly retirement income using the same investment rate assumptions as #3 (6% nominal annual rate, 0.5% monthly rate before and after retirement), but with the following deposit assumptions. One, she thinks she can deposit an extra $250/month into the 403c plan for a monthly deposit of $1250 into the 403c plan for the next 8 years which makes for a total monthly deposit of $2550 the upcoming year. Also, she thinks her salary and her mandated monthly pension plan deposit will increase 2% annually and believes she can also increase her 403C plan monthly deposit 2% each year from the current monthly deposit of $2550 this upcoming year (deposits 1-12). For example, her mandated monthly pension plan deposit for year 2 (deposits 13-24) will be $2601 and will increase 2% each year until retirement. Also remember these monthly deposits are on top of the $700,000 Prof. Business has invested today. Answer the following.

a. How much will Prof. Business have at retirement in 8 years under these assumptions?

b. What will Prof. Business’ monthly retirement withdrawal be for 20 years once she retires?

Answer 1

403c Total Compounded shorn (Take yearly IV IW NO 10HS na behom 1300 1250 2550 Monthly Contribution Total 403c Existing 231017 ste 4 1326 224 12.75, 2601 2) 23005.51 48892 (352-52 1300.5 2658.02 22137-40 46 768 1319.57 1326-512706-08 21202 44 737 42798 972 540 942 1407.16 1353-04 Ys. 27602 Y, X1:07278 2720714 y, x 1.068 /2 X 1:872 25887.39 | k.xlosa YzX1-0726 (24631.29 | 43 x 1.066 | 23495 54 22299.95 ус - Y6 Yx (10722 20189 YgX1:06 2 (Ysx 1022" (19209.68 | Y8 X 106" a) Final Retirement value = 7,00,000+ Total = 10,51,893 21218.2 1435.30 1380 to 2815.4 1461.o 1407.70 2871.71 1435.85 29 29-14 yearly Contribution con 189803/39169 18264-01 37473 $351893 1493.29 15 606 15000 30600 15912 16230.24 16554.84 16885-12 15300 15606 15919-12 16236-48 165612 16892-4 17230-2 31212 31836-24 52472.96 331224 23784-8 34460-52 35149-68 6) Assuming 4% withdrawal rate (general oule yearly withdrawal = 42,075 Monthly entendrawal = 3506.31 Y6 77 17223.6 17568012 17919-48 yg