CHAPTER 17 Retirement and Estate Planning

CASE 4 Calculation of Annual Savings Needed to Meet a Retirement Goal Nicci Denny, age 40, single, and from Colorado Springs, Colorado, is trying to estimate the amount she needs to save annually to meet her retirement needs. Nicci cur- rently earns $65,000 per year. She expects to need 80 per- cent of her current salary to live on at retirement. Nicci anticipates receiving about $1900 per month in Social Security benefits at age 65. Using the Run the Numbers worksheet on page 528, answer the following questions.

(a) What annual income would Nicci need for retirement?

(b) What would her annual expected Social Security benefit be?

(c) Nicci expects to receive $1,500 per month from her defined-benefit pension at work. What is her annual benefit?

(d) How much annual retirement income will she need from her retirement funds?

(e) How much will Nicci need to save by retirement in today's dollars if she plans to retire at age 65 and live to age 90?

(f) Nicci currently has $15,000 in a Roth IRA. Assuming a growth rate of 8 percent, what will be the value of her Roth IRA when she retires? (Hint: Don't take out income taxes.)

(g) How much additional money will she still need to save for retirement?

(h) What is the amount she needs to save each year to reach this goal?

Estimating Your Retirement Savings Goal in Today's Dollars This worksheet will help you calculate the amount you need to set aside each year in today's dollars so that you will have adequate funds for your retirement. The example here assumes that a single person is now 35 years old, hopes to retire at age 62, has a current income of $80,000, currently saves and invests about $4,800 per year to an IRA account, contributes zero to an employer-sponsored retirement per year assuming a spending lifestyle at 80 percent of current income ($80,000 0.80), and will live an additional 20 years beyond retirement. Investment returns are assumed to be 3 percent after inflation-a reasonable but conser ative estimate for a typical portfolio. The financial needs would differ if the growth rate of the investments were less than 3 percent. This approach simplifies the calculations and puts the numbers to estimate retirement needs into today's dollars. The amount saved must be higher if substantial anticipates needing a retirement income of $64,000 inflation occurs Example Your Numbers Annual income needed at retirement in today's dollars (Use carefully estimated numbers or a certain percentage, such as 70% or 80%.) Estimated Social Security retirement benefit in today's dollars Estimated employer pension benefit in today's dollars (Ask your retirement benefit advisor to make an estimate of your future pension, assuming that you remain in the same job at the same salary, or make your own conservative estimate.) Total estimated retirement income from Social Security and employer pension in today's dollars (line 2 p line 3) Additional income needed at retirement in today's dollars ine 1-line 4) Amount you must have at retirement in today's dollars to receive additional annual income in retirement (line 5) for 20 years (from Appendix A-4, assuming a 3% return over 20 years, or 14.8775 $21,000) Amount already available as savings and investments in today's dollars (add lines 7A through 7D, and record the total on line 7E A. Employer savings plans, such as a 401k), SEP-IRA, or profit-sharing plan B. IRAs and Keoghs C. Other investments, such as mutual funds, stocks, bonds, real estate, and 1. 64,000 $ 19,200 2. 3. $5,800 4. 25,000 $ 39,000 5. 6. $580,223 7. 7,200 _ 16,000 9,000 other assets available for retirement D. If you wish to include a portion of the equity in your home as savings, enter its present value minus the cost of another home in retirement E. Total retirement savings (add lines A through D) 32,200 8. Future value of current savingshinvestments at time of retirement (using Appendix A-1 and a growth rate of 3% over 27 years, the factor is 2.2213 71,526 9. Addional retirement savings and investments needed at time of retirement 10. Annua savings needed (to reach amount in line 9) before retirement (using thus, 2.2213 $37,000) line 6-line 8) Appendix A-3 and a growth rate of 3% over 27 years, the factor is 40.7096; $508,697 $ 12,496 $ 7,200 $ 5,296 thus, $230,239/40.7096) 11. Current annual contnbution to savings and investment plans 12. Additional amount of annual savings that you need to set aside in today's dollars to achieve retirement goal (in line 1) (line 10-line 11)