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David, age 52, has come to you for help in planning his retirement. He works for...

David, age 52, has come to you for help in planning his retirement. He works for an insurance company, where he earns $60,000. David would like to retire at age 62. He has consistently earned 8% on his investments and inflation has averaged 3%. Assuming he is expected to live until age 95 and he has a wage replacement ratio of 80%, how much will David need to have accumulated as of the day he retires to adequately provide for his retirement lifestyle?

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Answer #1

Step 1: Determine the present value of capital needs:
Step 1
Current Income $60,000
Wage Replacement Ratio x 80%
Present Value of Capital Needs $48,000
Step 2: Determine the future value of the capital needed in the first year of retirement:
PV $48,000
N (number of years until retirement) 10
i (inflation rate) 3
PMT 0
FV $64,507.99
Step 3: Determine the amount of savings (capital balance) needed at retirement to fund expenses throughout remainder of life expectancy using an annuity due:

PMT AD $64,507.99
N (retirement life expectancy) 33 (95-62)
i (inflation rate) 4.854 ((1.08 ÷ 1.03)) -1) x 100
PMT 0
FV $1,101,823.40

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