5. Funding the nest egg shortfall

Determining Retirement Shortfall

Yuan and Alex have 25 years to retirement. They are taking a personal finance course and have calculated their projected retirement income and investment needs. Based on their calculations and taking into account their Social Security and pension incomes, they have a projected shortfall of $6,500.00 per year.

Use the following tables to answer the questions about future value interest factors.

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The impact of the inflation factor

Continuing their worksheet, they consult a friend, economics professor Dr. Wu, who believes that they can expect the average annual inflation rate to be 5%, possibly 6% tops.

Complete the following table by calculating inflation-adjusted annual shortfall for Yuan and Alex at 5%. Then recalculate the shortfall based on the top rate provided by Dr. Wu.

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Funding the shortfall

In addition to determining a realistic inflation rate, Yuan and Alex talked to their financial advisor to understand rates of return now and after they reach retirement. First, their advisor projects that in 25 years, they can realistically earn 5% on their nest egg. Second, he recommends an investment vehicle that is earning 6% annually.

Complete the following table using the inflation-adjusted annual shortfall at 5% as previously calculated.

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5. Funding the nest egg shortfall Determining Retirement Shortfall Yuan and Alex have 25 years to retirement. They are taking a personal finance course and have calculated their projected retirement income and investment needs. Based on their calculations and taking into account their Social Security and pension incomes, they have a projected shortfall of $6,500.00 per year. Use the following tables to answer the questions about future value interest factors. The impact of the inflation factor Continuing their worksheet, they consult a friend, economics professor Dr. Wu, who believes that they can expect the average annual inflation rate to be 5%, possibly 6% tops. Complete the following table by calculating inflation-adjusted annual shortfall for Yuan and Alex at 5%. Then recalculate the shortfall based on the top rate provided by Dr. Wu. Interest rate Inflation-adjusted annual shortfall (Dollars) (Percent) 5 6 Funding the shortfall In addition to determining a realistic inflation rate, Yuan and Alex talked to their financial advisor to understand rates of return now and after they reach retirement. First, their advisor projects that in 25 years, they can realistically earn 5% on their nest egg. Second, he recommends an investment vehicle that is earning 6% annually. Complete the following table using the inflation-adjusted annual shortfall at 5% as previously calculated. Interest rate Amount of retirement funds required (Dollars) (Percent) Description Amount of retirement fund required 5 6 Annual savings required to fund nest egg Interest Factors-Future Value Interest FactorsFuture Value of an Annuity Periods 3.00% 5.00% 6.00% 8.00% 9.00% 20 1.810 2.653 3.210 4.661 5.600 25 2.090 3.386 4.290 6.848 8.620 30 2.420 4.322 5.740 10.062 13.260 35 2.810 5.516 7.690 14.785 20.410 40 3.260 7.040 10.280 21.724 31.410 Interest FactorsFuture Value Interest FactorsFuture Value of an Annuity Periods 3.00% 5.00% 6.00% 8.00% 9.00% 20 26.870 33.066 36.780 45.762 51.160 25 36.460 47.726 54.860 73.105 84.700 30 47.570 66.438 79.060 113.282 136.300 35 60.460 90.318 111.430 172.314 215.700 40 75.400 120.797 154.760 259.052 337.870