Question

Assume a traditional tax shelter Spreadsheet 21.5, calculate the effect on real consumption during retirement of a 1% increase in the rate of inflation to a 1% increase in the tax rate. Real Consumption Effect 1% increase in the rate of inflation 1% increase in the tax rate Reduce Reduce

Answer 1

This is calculated by replicating the given spreadsheet and then changing the inflation rate and tax rate to observe the effect on real consumption.

1). For a 1% increase in inflation rate, real consumption is 15,780; reduce

25 Retirement years Income growth 0.07 Age Income 50000 53500 57245 61252 65540 498906 533829 Total RETIREMENT Age Nom withdraw 65827 68460 162245 168735 Total 2741427 Inflation rate Exemption now 0.04 L 15000 Deflator Exemption 1.00 15000 1.04 15600 1.08 16224 1.12 16873 1.17 17548 3.79 56915 3.95 59191 Tax rate 0.25 Taxes 5016 5518 6065 6659 7304 92299 99999 1203168 Savings rate ROR Rror 0.15 0.06 0.0192 Savings Cumulative savings rConsumption 9922 9922 35063 10309 20826 36224 10698 32774 37428 11086 45826 38678 11472 60048 39974 -19502 1200312 112302 -25356 1246974 116365 265856 Real annuity 16040 Deflator 4.10 4.27 10.12 10.52 Exemption 61559 64021 151725 157794 Taxes 1067 1110 2630 2735 44437 Funds left rConsumption 1255966 15780 1262864 15780 159184 15780 01 15780

2). For a 1% increase in tax rate, real consumption is 58,983; reduce

25 30 Retirement years Income growth 0.07 Age Income 50000 53500 57245 61252 65540 498906 533829 Total RETIREMENT Age Nom withdraw 215736 222208 425773 438546 Total 7865566 Inflation rate Exemption now 0.03 15000 Deflator Exemption 1.00 15000 1.03 15450 1.06 15914 1.09 16391 1.13 16883 2.73 40979 2.81 42208 Tax rate 0.26 Taxes 5216 5684 61871 6727 7308 69113 74159 982317 Savings rate 0.15 Savings 9721 10506 11351 12261 13240 122994 132235 1736072 ROR Rror 0.06 0.0291 Cumulative savings rConsumption 9721 35063 20810 36224 334101 37428 47675 38678 63776 39974 3349766 112302 3682987 116365 Real annuity 74436 65 66 Deflator 2.90 2.99 5.72 5.89 Exemption 43474 44778 85800 88374 Taxes 44788 46132 88393 91045 1632938 Funds left 3688231 3687317 413723 0 Consumption 58983 58983 58983 58983 90/