Marybeth and Anneal Yao are beginning to contemplate retirement. They have saved a total of $ 500,000 for retirement and they are each just 45 years old. They realize that they have not saved sufficiently to be able to retire early, fully retire without some part-time employment, or replace 100 percent of their preretirement income. As such, they are willing to explore different approaches to reach retirement.

Marybeth and Anneal have a combined annual income of $125,000. They believe that their salaries will keep pace with inflation at 4% per year. They are also comfortable assuming that the effective annual rate of return for their retirement assets will be 9% before retirement and 6.5% after retirement. For now, Marybeth wants to keep the planning simple, projecting that they will both die in exactly 40 years and that their retirement assets will be depleted with the exception of $ 100,000 to cover funeral and burial costs. Lastly, they do not want to continue saving after they retire (either partly or fully).

As their financial planner, provide some assistance with these calculating the amount of retirement assets needed on the first day of retirement, based on the two options below. With the information in the case, which outcome requires the lowest monthly (end of month) contribution if they also require that their retirement annuity grow by 4.0 percent per year to keep up with inflation. (ignore the effects of income taxes and Social Security on answer)

a. To retire at age fifty five with income replacement ratio of 60%.

b. To retire at age fifty five with an income replacement ratio of 100% but work part-time for an additional 10 years to offset half the projected annual need for those ten years. (The clients will have a 50% replacement ratio for 10 years and a 100% replacement ratio thereafter)

c. To retire at age sixty-five with an income replacement ratio of 100%