Retirement: 1-3,4 Retirement Planning Calculations Flashcards
Retirement: 1-3,4 Retirement Planning Calculations
If an individual is projected to have an annual retirement income deficit of $50,000 (in first retirement-year dollars) and expects to earn an average annual 7% investment return over a 30-year retirement period, what is the lump-sum retirement fund required? Assume a 4% inflation rate.
1-3,4
Period = 1 Mode = BEG N = 30 I/YR = 2.8846% PV = ? PMT = $50,000 FV = N/A
PV = $1,023,500
Retirement: 1-3,4 Retirement Planning Calculations
John and Betty are both age 47, and anticipate retiring when they are both age 66. With your help they have determined that their retirement income shortfall, in today’s dollars, is $35,000. They want to plan for a 30-year retirement period since longevity runs in their families. Assuming a 6.5% rate of return, and an inflation rate of 3%, what lump-sum amount would they need at the beginning of retirement to fund this income shortfall using the capital utilization method?
1-3,4
Step 1: Period = 1 Mode = BEG N = 19 I/YR = 3% PV = $35,000 PMT = N/A FV = ?
FV = $61,373
Step 2: Period = 1 Mode = BEG N = 30 I/YR = 3.3981% PV = ? PMT = $61,373 FV = N/A
PV = $1,182,176
Retirement: 1-3,4 Retirement Planning Calculations
The Cornells plan to retire in 15 years, and have determined that they will need an additional $ 70,000 per year in retirement year one dollars in order to enjoy the type of retirement they envision. They want to plan for a 25-year retirement period, expect to achieve a blended rate of return on their investments of 6%, and expect inflation to run at 3.5%. They have asked you to calculate the lump-sum amount they will need at the beginning of retirement to fund this shortfall.
1-3,4
Period = 1 Mode = BEG N = 25 I/YR = 2.4155% PV = ? PMT = $70,000 FV = N/A
PV = $1,333,716
Retirement: 1-3,4 Retirement Planning Calculations
Module Check Summary
- John and Sally have assets worth $84,000 that they plan to use to fund their retirement in 17 years. If they expect the assets to continue to grow at an annual rate of 7%, what will the assets be worth in 17 years?
a. $235,647
b. $245,762
c. $255,879
d. $265,340
(LO 1-3)
d. $265,340
Period = 1 Mode = BEG N = 17 I/YR = 7% PV = 84,000 PMT = $0 FV = ?
FV = $265,340
Retirement: 1-3,4 Retirement Planning Calculations
Module Check Summary
- You have determined with Bob and Jill that their current resources will provide an annual retirement income deficit of $37,000 (in first-retirement-year dollars). They expect to earn an average yearly return on their investments of 6%. They also assume inflation will average 4% during their retirement. Using a 27-year retirement period, what is the lump-sum retirement fund required?
$773,603
$788,482
$1,318,712
$2,498,540
(LO 1-4)
$788,482
Period = 1 Mode = BEG N = 27 I/YR = 1.9231% PV = ? PMT = 37,000 FV = N/A
PV = $788,482
Retirement: 1-3,4 Retirement Planning Calculations
Module Check Summary
- After meeting with your clients, the Smiths, you have determined that their annual retirement income need, net of expected Social Security benefits, will be $22,000 in today’s dollars. They anticipate an annual after-tax return of 6% on their investments, and they expect inflation to average 4% over the long term. They also plan to retire in 25 years, and they want their projected retirement income to last for 30 years. Based upon this information, determine the lump-sum amount (plus or minus $25) that the Smiths will need at the beginning of retirement to fund their retirement.
$1,313,507
$1,327,503
$1,339,777
$1,353,036
(LO 1-4)
$1,353,036
Step 1: Period = 1 Mode = BEG N = 25 I/YR = 4% PV = $22,000 PMT = $0 FV = ?
FV = $58,648
Step 2: Period = 1 Mode = BEG N = 30 I/YR = 1.9231% PV = ? PMT = $58,648 FV = $0
PV = $1,353,036
Retirement: 1-3,4 Retirement Planning Calculations
Module Check Summary
- Bill and Mary Parker are projected to need a lump-sum retirement fund of $4,353,036. Their assets will amount to $4 million at the beginning of the first retirement year, leaving $353,036 to be saved over the pre-retirement period. The Parkers have 25 years until they plan to retire. Based upon an expected 4% inflation rate and a 6% after-tax return on their investments, calculate the Parkers’ first end-of-year (increasing) savings requirement.
$4,215
$4,260
$4,299
$4,342
(LO 1-4)
$4,342
Step 1: Period = 1 Mode = BEG N = 25 I/YR = 4% PV = ? PMT = $0 FV = $353,036
PV = $132,430
Step 2: Period = 1 Mode = END N = 25 I/YR = 1.9231% PV = $0 PMT = ? FV = $132,430
PMT = $4,175
Step 3:
$4,175
+ 4%
= $4,342
Retirement: 1-3,4 Retirement Planning Calculations
Module Check Summary
- The Simsons need to save an additional $300,000 (in retirement year 1 dollars) to build a retirement fund that is capable of supporting their targeted retirement lifestyle. They expect to earn a 7% after-tax return on their retirement savings and are assuming a 5% long-term inflation rate. Their preference is to allocate a level annual savings amount to build this fund. What level annual end-of-year savings amount will the Simsons need to deposit at the end of each year during their 20-year pre-retirement period?
$4,698
$7,318
$9,073
$12,347
(LO 1-3,4)
$7,318
Period = 1 Mode = END N = 20 I/YR = 7% PV = $0 PMT = ? FV = $300,000
PMT = $7,318
Retirement: 1-3,4 Retirement Planning Calculations
The following is the formula for what?
Period = 1 Mode = BEG N = number of periods (years) until retirement I/YR = growth/appreciation rate PV = current market value PMT = N/A FV = ?
FV = ?
a. Estimate future value of available resources at retirement.
b. Estimate future value of future savings/investment program at retirement.
c. Determine retirement fund needed to meet income deficit.
(LO 1-3,4)
a. Estimate future value of available resources at retirement.
Retirement: 1-3,4 Retirement Planning Calculations
The following is the formula for what?
Period = 1 Mode = BEG N = number of periods (years) until retirement I/YR = fund earnings rate PV = N/A PMT = annual level savings amount FV = ?
FV = ?
a. Estimate future value of available resources at retirement.
b. Estimate future value of future savings/investment program at retirement.
c. Determine retirement fund needed to meet income deficit.
(LO 1-3,4)
b. Estimate future value of future savings/investment program at retirement.
Retirement: 1-3,4 Retirement Planning Calculations
Fred and Wilma are both age 40 and plan to retire at age 62, so they have 22 years until retirement. The anticipate inflation at 3%. The PV of their deficit is $22,000. So the future value of the income amount they would need in the first year of retirement is:
(LO 1-3,4)
Period = 1 Mode = BEG N = 22 I/YR = 3% PV = $22,000 PMT = $0 FV = ?
FV = $42,154
Retirement: 1-3,4 Retirement Planning Calculations
When calculating an income stream in retirement you should always have your calculator set in the ____ mode. This is because when clients retire they will always need the money at the beginning of each year to then pay for retirement.
a. BEG
b. END
(LO 1-3,4)
a. BEG
Retirement: 1-3,4 Retirement Planning Calculations
Keep in mind that unless otherwise indicated, retirement income payments are assumed to be made at the _____ of the year, while savings to build the retirement fund are deposited at the _____ of the year
BEG
END
(LO 1-3,4)
Keep in mind that unless otherwise indicated, retirement income payments are assumed to be made at the BEG of the year, while savings to build the retirement fund are deposited at the END of the year
Retirement: 1-3,4 Retirement Planning Calculations
The following is the formula for what?
Period = 1 Mode = BEG N = number of periods (years) until retirement I/YR = Inflation rate PV = present value of retirement income deficit PMT = N/A FV = ?
FV = ?
a. Estimate future value of available resources at retirement.
b. Estimate future value of future savings/investment program at retirement.
c. Determine retirement fund needed to meet income deficit.
(LO 1-3,4)
c. Determine retirement fund needed to meet income deficit.
Retirement: 1-3,4 Retirement Planning Calculations
Fred and Wilma need to save an additional $768,064 by the beginning of retirement to make up for their
shortfall from Social Security and any inflation-adjusted pensions to achieve the level of retirement income ($22,000 in today’s dollars, $42,154 in retirement year one dollars) that they desired. Fred and Wilma have 22 years until retirement and they assume to earn 7% on their investments, so the annual level savings amount would be:
a. $13,673
b. $14,673
c. $15,673
1-3,4
c. $15,673
Period = 1 Mode = END N = 22 I/YR = 7% PV = N/A PMT = ? FV = $768,064
PMT = $15,673
Note that this is done in the “end” mode, not the “begin” mode. As stated before, unless otherwise indicated, retirement income payments are assumed
to be made at the beginning of the year to pay for that year’s expenses, while savings to build the retirement fund are deposited at the end of the year. If Fred and Wilma deposit $15,673 at the end of each year for the next 22 years, and earn a 7% return on their savings, they will get to the $768,064 that they need. We have already taken inflation into account when we calculated the $768,064, so we do not concern ourselves with it in this calculation; all that is needed is the rate of return.
