Case 5 The Johnsons Consider Retirement Planning Harry Johnson’s father, William, was recently forced into early retirement at age 63 because of poor health. In addition to the psychological drawbacks of the unanticipated retirement, William’s fi nancial situation is poor because he had not planned adequately for retirement. His situation has inspired Harry and Belinda to take a look at their own retirement planning. Together they now make about $72,000 per year and would like to have a similar level of living when they retire. Harry and Belinda are both 27 years old and recently received their annual Social Security Benefi ts Statements indicating that they could expect about $18,000 per year in today’s dollars as retirement benefi ts at age 67. Although their retirement is a long way off , they know that the sooner they put a plan in place, the larger their retirement nest egg will be.

(a) Belinda believes that the couple could maintain their current level of living if their retirement income represented 75 percent of their current annual income after adjusting for infl ation. Assuming a 4 percent infl ation rate, what would Harry and Belinda’s annual income need to be over and above their Social Security benefi ts when they retire at age 67? (Hint: Use Appendix A.1 or visit the Garman/Forgue companion website.)