Creating a retirement plan.

a. One rule of thumb says that you need 70 to 80 percent of your preretirement

income after you finish working. Suppose that you have a career job from age 25

until age 65, and you are hired at a salary of $45,000. Suppose you get a raise of

2% every year.

If these are the only pay increases you get, what will your salary be when you

retire? What does the rule of thumb say you will need per month when you

retire?

b. Determine how much you need to have in your account at retirement to be able

to take this monthly amount (the one from (a)) out for 35 years after retirement.

Assume that your account has an interest rate of 6% compounded monthly.

c. Now consider the different ways to achieve the retirement goal you found in (b).

To do this, complete the table below where different monthly deposits are

suggested. This table gives you different monthly deposit amounts; for each,

calculate how many deposits you will need and assume this number is exactly

the number of contributions you need to make. From that, calculate total

contributions and interest earned in the pre-retirement time period.

Monthly

Deposit

Number of Deposits

Needed

Total

Contributions

Interest Earned

$200

$400

$600

$800

d. Using the table above, pick a retirement savings plan that you think is best and answer the following questions:

i. At what age do you need to start saving for retirement?

ii. Why do you think this is the best plan of the ones listed? Make sure you

support this with numerical evidence!