Most of you will work for companies that will no longer have pension systems and you...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Most of you will work for companies that will no longer have pension systems and you may not be able to count on having Social Security at all in retirement. Therefore, you will need to generate your own retirement income by saving a large quantity of money in a 401K or other similar retirement account over your lifetime. The mistake many people make is to wait to start saving any significant amount of money until they are in their later 30s or 40s (or worse even later). In this problem, we will analyze several situations to see what the impact of those choices are on how much you must save each year to generate the retirement income you will need. Most conventional wisdom says that when you retire, you want to be able to replace 65% of your take home earnings from your job (i.e. this basically assumes that 35% of your earnings were being used to pay the mortgage on your house and that you will have paid off your house by the time you retire, so to maintain your lifestyle you only need income to replace the other 65% of your take home earnings that you were spending on everything else). So how much do you need your retirement savings to generate in yearly income? Let's assume you were graduating today, you were 22 years old, and that as a Chemical Engineer your starting salary was $70,000 per year. If we assume that on average you earned a 2.5% raise per year (i.e. not an unreasonable raise to keep up with inflation), then if you wait until you are 65 years old to retire, your salary when you are 65 would be, $68,000 x (1.025)43 = $196,623.40 Let's assume that you will be paying an average personal income tax rate of 25% at that time, so your take home earnings per year when you are 65 would be, $202,406.40 x 0.75= $147,467.50 So to replace 65% of your take home earnings your investments would need to generate a yearly cash flow of Yearly Retirement Withdrawal Cash Flow = $147,467.50 x 0.65= $95,853.89 Using a Future Value Cash Flow Table to Analyze a "Safe" Plan Analyze the following scenario by using Excel to calculate a Future Value cash flow table to provide answers to the questions posed. In the PDF containing your answers, be sure to paste in copies of the relevant Excel tables you used to determine your answers. Let's assume you want to generate the required $98,673 per year in retirement by switching over your retirement savings into a very safe 4% interest yield account and that you only withdraw the interest to live on (i.e. you never deplete the balance of account and can thus be secure no matter how long you live and also can leave it to your children, etc.). You would need to amass a final account value by the time you retire and transition it to the 4% yielding safe account of $95,853.89/0.04= $2,396,347 to generate that much interest to live on for the rest of your life. While you are working, let's assume you use a moderate to aggressive risk investment account that can generate 7% interest per year on your savings. If you start saving the same amount each and every year when you start your job by saving each year and making your first deposit at age 23 (i.e. you save up during the year from age 22 to age 23 and place your deposit in the bank at the beginning of each year starting at age 23), how much must you save each year to provide the needed income for retirement? Again assume you work the year you are 65 and retire right at the end of that year, so you do not make a yearly deposit into your retirement account at the end of that year (i.e. the start of your age 66 year) and instead use any money you saved the year your are turning 65 to make your retirement transition. So your last retirement deposit will come at the beginning of your age 65 year from money you save the previous year and will only have one year to accrue interest before you have to convert your entire account over to the safe 4% yield interest account. Most of you will work for companies that will no longer have pension systems and you may not be able to count on having Social Security at all in retirement. Therefore, you will need to generate your own retirement income by saving a large quantity of money in a 401K or other similar retirement account over your lifetime. The mistake many people make is to wait to start saving any significant amount of money until they are in their later 30s or 40s (or worse even later). In this problem, we will analyze several situations to see what the impact of those choices are on how much you must save each year to generate the retirement income you will need. Most conventional wisdom says that when you retire, you want to be able to replace 65% of your take home earnings from your job (i.e. this basically assumes that 35% of your earnings were being used to pay the mortgage on your house and that you will have paid off your house by the time you retire, so to maintain your lifestyle you only need income to replace the other 65% of your take home earnings that you were spending on everything else). So how much do you need your retirement savings to generate in yearly income? Let's assume you were graduating today, you were 22 years old, and that as a Chemical Engineer your starting salary was $70,000 per year. If we assume that on average you earned a 2.5% raise per year (i.e. not an unreasonable raise to keep up with inflation), then if you wait until you are 65 years old to retire, your salary when you are 65 would be, $68,000 x (1.025)43 = $196,623.40 Let's assume that you will be paying an average personal income tax rate of 25% at that time, so your take home earnings per year when you are 65 would be, $202,406.40 x 0.75= $147,467.50 So to replace 65% of your take home earnings your investments would need to generate a yearly cash flow of Yearly Retirement Withdrawal Cash Flow = $147,467.50 x 0.65= $95,853.89 Using a Future Value Cash Flow Table to Analyze a "Safe" Plan Analyze the following scenario by using Excel to calculate a Future Value cash flow table to provide answers to the questions posed. In the PDF containing your answers, be sure to paste in copies of the relevant Excel tables you used to determine your answers. Let's assume you want to generate the required $98,673 per year in retirement by switching over your retirement savings into a very safe 4% interest yield account and that you only withdraw the interest to live on (i.e. you never deplete the balance of account and can thus be secure no matter how long you live and also can leave it to your children, etc.). You would need to amass a final account value by the time you retire and transition it to the 4% yielding safe account of $95,853.89/0.04= $2,396,347 to generate that much interest to live on for the rest of your life. While you are working, let's assume you use a moderate to aggressive risk investment account that can generate 7% interest per year on your savings. If you start saving the same amount each and every year when you start your job by saving each year and making your first deposit at age 23 (i.e. you save up during the year from age 22 to age 23 and place your deposit in the bank at the beginning of each year starting at age 23), how much must you save each year to provide the needed income for retirement? Again assume you work the year you are 65 and retire right at the end of that year, so you do not make a yearly deposit into your retirement account at the end of that year (i.e. the start of your age 66 year) and instead use any money you saved the year your are turning 65 to make your retirement transition. So your last retirement deposit will come at the beginning of your age 65 year from money you save the previous year and will only have one year to accrue interest before you have to convert your entire account over to the safe 4% yield interest account.
Expert Answer:
Answer rating: 100% (QA)
To determine the amount that you need to save each year in order to achieve your retirement goals yo... View the full answer
Related Book For
Federal Taxation 2018 Comprehensive
ISBN: 9780134532387
31st edition
Authors: Thomas R. Pope, Timothy J. Rupert, Kenneth E. Anderson
Posted Date:
Students also viewed these law questions
-
Many of you will work for a small business. Some of you will even own your own business. In order to operate a small business, you will need a good understanding of managerial accounting, as well as...
-
Many of you will work for a small business. As noted in the All About You feature in this chapter, some of you will even own your own business. In order to operate a small business you will need a...
-
Many of you will work for a small business. Some of you will even own your own business. In order to operate a small business, you will need a good understanding of managerial accounting, as well as...
-
This exercise shows that the multiplier may be interpreted as a rate of change in general. Assume that the maximum of (x, y) subject to g(x, y) = c occurs at a point P. Then P depends on the value...
-
If one car owner is randomly selected, find the probability of getting someone who lives in a large city, given that her or his car is foreign. Are owning a foreign car and living in large cities...
-
You are flying your glider around your local airport for fun one late Saturday afternoon in July. The convective currents are great that day. You fly for about 1.5 hours enjoying a perfect day for...
-
Consider the concentrating photovoltaic apparatus of Problem 7.15. The apparatus is to be installed in a desert environment, so the space between the concentrating lens and top of the photovoltaic...
-
If a system expands in volume by an amount V (m 3 ) against a constant restraining pressure P(N/m 2 ), a quantity PV(J) of energy is transferred as expansion work from the system to its surroundings....
-
As you lead your organization's performance management efforts, your chief human resources officer has real concerns about the buy-in among your staff. She has come to you to share her thoughts. With...
-
Problem 9 (50 Points) An air-cooled aluminum heat sink is used to keep electronics cool (see image and diagram). The cooling requirements are being significantly increased. To increase the rate of...
-
A manufacturing firm produces electrical items for export market. The company uses a job order costing system in which a predetermined overhead rates are used to apply manufacturing overhead cost to...
-
Zetatron is an all-equity firm with 270 million shares outstanding, which are currently trading for $23.64 per share. A month ago, Zetatron announced it will change its capital structure by borrowing...
-
Describe the major elements and issues with an object-oriented approach to developing information systems.
-
Cisoft is a highly profitable technology firm that currently has $5 billion in cash. The firm has decided to use this cash to repurchase shares from investors, and it has already announced these...
-
Suppose Microsoft has 7.26 billion shares outstanding and pays a marginal corporate tax rate of 31%. If Microsoft announces that it will pay out $42 billion in cash to investors through a combination...
-
Compare the phases of the Unified Process with the phases of the waterfall model.
-
Determine the stiffness matrix K for the truss. AE is constant. M M2 M3 M Suppose that K ==== AEM = AE M5 M6 M7 M8 where the submatrices M1, M2, that are equal to the rows of the matrix M. (Figure 1)...
-
Fahrad Inc. sells all of its product on account. Fahrad has the following accounts receivable payment experience: Percent paid in the month of sale .........10 Percent paid in the month after the...
-
Sylvia, a dentist with excellent skills as a carpenter, started the construction of a house that she planned to give to her son as a surprise when he returned from Afghanistan, where he is serving in...
-
Sometimes taxpayers may not be able to file their tax returns by the normal due date. Are extensions available? How long are the extensions? Do extensions enable taxpayers to delay paying the tax...
-
Tim retired during the current year at age 58. He purchased an annuity from American National Life Company for $40,000. The annuity pays Tim $500 per month for life. a. Compute Tims annual exclusion....
-
Vigilance Inc. provides secret shopping services to assist other companies in quality control. Vigilance has just been awarded a contract by Freshway Supermarkets to monitor the customer service...
-
VitaComp manufactures nonpharmaceutical pills and pellets from dry ingredients, using a collection of machinery it maintains in a large job shop. Machine AA-23 molds circular pellets to an average...
-
How could bottleneck management's recommendations concerning the distinction between activation and utilization relate to personal time management?
Study smarter with the SolutionInn App