Bob and Martha, a married couple, are both 42 years old and want to retire when
ID: 2798630 • Letter: B
Question
Bob and Martha, a married couple, are both 42 years old and want to retire when they reach age 65. After careful calculation, they have determined they could live comfortably on $65,000 a year in today’s dollars when they retire. They are eligible to receive $2,000 in combined monthly Social Security benefits and $1,600 combined monthly income from their company pensions. They are comfortable assuming an inflation rate of 3%, an after-tax rate of return of 5% on their invested assets, and a life expectancy to age 90. Their combined federal and state income tax bracket is 33%. Carry real return to nearest hundredth. Using the example from the module reading and lecture, approximately how much is their Retirement Savings Goal (lump sum of personal savings needed at start of retirement)?
Explanation / Answer
Real Return = (After Tax Rate of Return)*(Inflation Rate)-1
=(1.05)*(1.03)-1
=8.15%
Total Years of after the Retirement = Life Expectancy - Retirement age
=90-65
=25 Years
Total Amount Required after the Retiremtn = 65,000*25 Years
=1,625,000
Savings Per year = Amount Required after the Retirement
______________________________________________
8.15% Future Value of Annuity factor for 23 Years (65-42)
=1,625,000/66.0898(8.15% For 23 Years)
=24,587.76
Savings annually amount = $ 24,587.76