Question: Your Client, Saben, Is 40 And Wants To Retire In 20 Years. His Family Has A History Of Living Well Into Their 90s. Therefore, He Would Like To Plan On Living Until Age 100, Just In Case. He Currently Needs $100,000 And Expects That He Will Need About 80% Of That If He Were Retired. He Can Earn 9 Percent In His Portfolio And Expects Inflation To Be 3 …

Question: Your Client, Saben, Is 40 And Wants To Retire In 20 Years. His Family Has A History Of Living Well Into Their 90s. Therefore, He Would Like To Plan On Living Until Age 100, Just In Case. He Currently Needs $100,000 And Expects That He Will Need About 80% Of That If He Were Retired. He Can Earn 9 Percent In His Portfolio And Expects Inflation To Be 3 …

Your Client, Saben, is 40 and wants to retire in 20 years. Hisfamily has a history of living well into their 90s. Therefore, hewould like to plan on living until age 100, just in case. Hecurrently needs $100,000 and expects that he will need about 80% ofthat if he were retired. He can earn 9 percent in his portfolio andexpects inflation to be 3 percent annually. In addition, hereceived $500,000 from his uncle BJ when he died. Saben has spent$200,000 on his home but is investing $300,000 for his retirement.His Social Security benefit in today’s dollars is $20,000. Answerthe following questions.

  1. If Saben retired today, what annual amount would his retirementportfolio have to provide to him. Remember to subtract the SocialSecurity payment as this reduces what his portfolio is required toprovide.
  2. Inflate the required amount in Step 1 by the inflation rate. Soyour n = 20 years, rate = inflation rate, etc. In essence this iswhat is required in his first year of retirement (age 60).
  3. Calculate the Present Value of the retirement annuity in Step2. This is an annuity due problem as the annualwithdrawals occur at the beginning of each year for 40 years. Usethe real rate here.
  4. Calculate how much he needs to save at the end of each yearfrom age 40 to age 60 so that he will accumulate the amount in Step3 at age 60. Use the portfolio rate of return (9%) here as we havealready adjusted the required annual payment for inflation in Step2. This is an ordinary annuity.