Question

Current age: 32

Age of retirement:65

Annual income: $45,750

Expected salary increase: 2.5%

Expected rate of inflation: 3%

Social Security may provide $32,864

Based on an inflation rate of 3.00% the value of $32,864.00 is going to be reduced to $12,390.59 in 33 years.

Discuss the difference between the projected annual benefit, and the real buying power of your projected benefit based on the impact and projection of inflation. Realizing the difference between current and future value of benefits, discuss whether you could you survive on your Social Security income alone. If not, suggest ways you plan on augmenting your future retirement income. Discuss the actions you can take in order to meet your future lifestyle objectives.

Answer 1

Real buying power after 33 years = projected annual benefit / (1 + inflation)³³

Real buying power after 33 years = $32,864 / (1 + 0.03)³³ = $12,390.59

The real buying power has reduced due to inflation

Surviving on social security income alone would be very difficult as there is substantial erosion of buying power. The goods/services that can be purchased would reduce drastically, as their prices would have increased a lot.

To augment future retirement income, one option is to start contributing monthly into a retirement account now, and at the end of 33 years convert the retirement account into an annuity that would pay a monthly pension . This monthly pension would supplement the social security income.

In order to match future lifestyle objectives, savings must begin now, and increase every year at least at the rate of inflation. This way, the real value of investments would stay constant and be sufficient to fund retirement goals