Case 1 The Johnsons Consider Retirement Planning Harry Johnson’s father, William, was recently forced into early retirement at...

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Case 1
The Johnsons Consider Retirement Planning
Harry Johnson’s father, William, was recently forced into earlyretirement at age 63 because of poor health. In addition to thepsychological drawbacks of the unan- ticipated retirement,William’s financial situation is poor because he had not plannedadequately for retirement. His situation has inspired Harry andBelinda to take a look at their own retirement planning. Togetherthey now make about $100,000 per year and would like to have asimilar level of living when they retire. Harry and Belinda areboth 27 years old and recently received their annual SocialSecurity Benefits Statements indicating that they could expectabout $28,000 per year in today’s dollars as retirement benefits atage 67. Although their retirement is a long way off, they know thatthe sooner they put a plan in place, the larger their retirementnest egg will be.
(a) Belinda believes that the couple could maintain theircurrent level of living if their retirement income represented 75percent of their current annual income after adjusting forinflation. Assuming a 4 percent inflation rate, what would Harryand Belinda’s annual income need to be over and above their SocialSecurity benefits when they retire at age 67?
(b) Both Harry and Belinda are covered by defined- contributionretirement plans at work. Harry’s employer will contribute $1170per year, and Belinda’s employer will contribute $1140 per year inaddition to the $4620 total that Harry and Belinda can contribute.Assuming a 7 percent rate of return, what would their retirementnest egg total 40 years from now?
(c) For how many years would the retirement nest egg provide theamount of income indicated in Question (a)? Assume a 4 percentreturn after taxes and inflation.

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a)	Annual requirement after retirement				=	$100,000*0.75
					=	$75,000

	Amount Available from social security				=	$28,000
	(in present $ terms)

	Additional amount before inflation				=	$75000-$28000
					=	$47,000

	Amount after inflation over security benefits				=	$47000*(1.04)^40
					=	$47000*4.8010
					=	225647.9695


b)	Total amount				=	$1170+$1140+$4620
					=	$6,930

	future value at retirement				=	$6930*FVAF(7%,40 years)
					=	$6930*199.64
					=	$1,383,471.33

c)	To find out these we create the following table

			amount withdrwan
year	opening bal	interest@4%		Closing bal
1	$1,383,471.33	$55,338.85	225647	$1,213,163.18
2	$1,213,163.18	$48,526.53	225647	$1,036,042.71
3	$1,036,042.71	$41,441.71	225647	$851,837.41
4	$851,837.41	$34,073.50	225647	$660,263.91
5	$660,263.91	$26,410.56	225647	$461,027.47
6	$461,027.47	$18,441.10	225647	$253,821.57
7	$253,821.57	$10,152.86	225647	$38,327.43
8	$38,327.43	$1,533.10	225647	($185,786.47)

	since amount becomes -ve in year 8,they can withdraw only upto 7 years

	The saving has been exhausted in just 7 years because they aimed to withdraw $225647 but invested very little amount ($6930) comparetively

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Transcribed Image Text

Case 1The Johnsons Consider Retirement PlanningHarry Johnson’s father, William, was recently forced into earlyretirement at age 63 because of poor health. In addition to thepsychological drawbacks of the unan- ticipated retirement,William’s financial situation is poor because he had not plannedadequately for retirement. His situation has inspired Harry andBelinda to take a look at their own retirement planning. Togetherthey now make about $100,000 per year and would like to have asimilar level of living when they retire. Harry and Belinda areboth 27 years old and recently received their annual SocialSecurity Benefits Statements indicating that they could expectabout $28,000 per year in today’s dollars as retirement benefits atage 67. Although their retirement is a long way off, they know thatthe sooner they put a plan in place, the larger their retirementnest egg will be.(a) Belinda believes that the couple could maintain theircurrent level of living if their retirement income represented 75percent of their current annual income after adjusting forinflation. Assuming a 4 percent inflation rate, what would Harryand Belinda’s annual income need to be over and above their SocialSecurity benefits when they retire at age 67?(b) Both Harry and Belinda are covered by defined- contributionretirement plans at work. Harry’s employer will contribute $1170per year, and Belinda’s employer will contribute $1140 per year inaddition to the $4620 total that Harry and Belinda can contribute.Assuming a 7 percent rate of return, what would their retirementnest egg total 40 years from now?(c) For how many years would the retirement nest egg provide theamount of income indicated in Question (a)? Assume a 4 percentreturn after taxes and inflation.