Your client, Bill Smith engages you to assist him in planning for his retirement.

Specifically, he wants the following question answered:

In addition to the amounts described below, how much money will I need to invest at the end of each of the next three years (i.e., December 2020, 2021 and 2022), invested at 4.5% (compounded annually), so I may retire at my desired standard of living at the end of three years from now (December 31, 2022)?

Assume today is January 1, 2020 and ignore the impact of income taxes throughout.

In order to answer Bill’s question, you gather the following information from him:

• Bill desires an income in today’s dollars of $85,000 during each year of his retirement, which is assumed to last 16 years.
• One of Bill greatest concerns is inflation. He recently read inflation is expected to average 2.5% annually over the next twenty years. Thinking about the impact of inflation, remember that to maintain $1 in purchasing power, $1.025 would be required next year if inflation was 2.5%.
• Bill will be eligible for Social Security. Assuming Social Security benefits increase 2% per year as they have in the past, Bill would receive $24,500 in the first year of retirement, increasing thereafter at the historical rate (2%).
• Bill has been told by his employer that at December 31, 2022 he will be eligible for a fixed pension of $32,000 per year. This pension is fixed and does not increase in subsequent years.
• Bill currently has $20,000 in a certificate of deposit account earning 2% compounded annually which matures on his retirement date. He states that these funds will be made available to support his retirement savings pool as of the date of his retirement (at which time these funds will be combined with the account set up for his three annual payments and will begin earning the higher rate of return).

In addition to the answer to his question, Bill asks that you provide sufficient detail so he may review and understand your analysis.

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Answer rating: 100% (QA)

Here is the analysis to answer Bills question To determine how much Bill needs to invest at the end of each of the next three years 2020 2021 and 2022 ... View the full answer