1. $75,000 /year needed during retirement

Retirement will last 25 years

30 years until retirement

6.0% return before and during retirement

3.25% inflation rate

• Use the present value of an annuity (annuity due) to calculate the lump sum needed at retirement assuming the principal will be liquidated.

• Inflate to the amount needed in dollars on the retirement date.

• Use the future value of an annuity (ordinary annuity and annuity due) to calculate the required annual savings.

How much must be saved if the principal is not liquidated?

• Calculate the present value of the lump sum needed at retirement for the length of the retirement period and add it to the lump sum needed at retirement.

• Use the new future value to calculate the annual savings (ordinary annuity and annuity due).

What if the principal is not liquidated and it is to keep its purchasing power?

• Calculate the present value of the lump sum needed at retirement for the length of the retirement period and add it to the lump sum needed at retirement (using the inflation-adjusted rate of return).

• Use the new future value to calculate the annual savings (ordinary annuity and annuity due).

Capital Needs Analysis HW Retirement Planning Homework Spring 13 1. $75,000 /year needed during retirement Retirement will last 25 years 30 years until retirement 6.0% return before and during retirement 3.25% inflation rate Use the present value of an annuity (annuity due) to calculate the lump sum needed at retirement assuming the principal will be liquidated. Inflate to the amount needed in dollars on the retirement date. Use the future value of an annuity (ordinary annuity and annuity due) to calculate the required annual savings. 1/5 Capital Needs Analysis HW Retirement Planning Homework Spring 13 How much must be saved if the principal is not liquidated? Calculate the present value of the lump sum needed at retirement for the length of the retirement period and add it to the lump sum needed at retirement. Use the new future value to calculate the annual savings (ordinary annuity and annuity due). What if the principal is not liquidated and it is to keep its purchasing power? Calculate the present value of the lump sum needed at retirement for the length of the retirement period and add it to the lump sum needed at retirement (using the inflationadjusted rate of return). Use the new future value to calculate the annual savings (ordinary annuity and annuity due). 2/5 Capital Needs Analysis HW Retirement Planning Homework Spring 13 2. Your clients, Tom and Melissa Sampson (age50), want to retire when they are 70 and want to provide 25 years of income during retirement. Based on their current level of living, they would like to provide for $100,000/year (in current dollars) during retirement. They currently have $500,000 in Roth IRAs. Social Security will provide $40,000/year in current dollars. They have made the following rate estimates: 3.0% inflation before and after retirement, 6.0% return on investments before retirement, and 5.0% return on investments after retirement. Assuming they are willing to liquidate the principal during retirement and they will save at the end of the period and withdrawal at the beginning, find: a) How much they will need to save each year toward retirement in order to take annual distributions, and b) How much they will need to save each month in order to take monthly distributions. 3/5 Capital Needs Analysis HW Retirement Planning Homework Spring 13 3. Using the information in Problem 2, redo the needs analysis for an ordinary annuity and an annuity due assuming Tom and Melissa have a gross need of $100,000/year for 10 years after which their gross needs would decrease to $80,000 for the remainder of their lives. 4/5 Capital Needs Analysis HW Retirement Planning Homework Spring 13 4. Redo Problem 2 changing the rate of return on investment to 6% before and after retirement and calculate the annual savings needed to make annual distributions using: a) The present and future values, then b) The cash flow calculator. 5/5