Retirement Savings

One of the first things you should do once you have begun your career is to plan on how you will end it$.$ By that, I mean

retirement. If you learn only one thing from this project, I hope it is that being young people, time is your best friend

when it comes to securing your retirement. Indeed, the longer you wait to begin saving, the higher the interest rate $($and

larger deposits$)$ you will need to earn to generate the same amount in your retirement account.

To begin this part of the model, you should already have completed the Income part. The reason for this is that we will

attempt to secure you that level of income $($until you die$)$ in perpetuity. $($We don't want you to "outlive your money".$)$

This is different than many of the savings and retirement questions we have already done because we are not setting a

time limit on how long we want to take money out of our savings. Of course, our calculations will work with any income

level you choose, so if you want to have a higher income in retirement, you may, but again, try to be as honest and

realistic as you can. Let us call this your yearly desired income.

This first calculation will use simple interest. You will want to "live off the interest" your account generates each year, so

the interest earned in a year needs to equal the income we desire. But we have not determined the interest rate you will

earn during retirement.

Notice that this will not be the same rate you earned while you were working. This is because you will not want to

take as much market risk at that stage of your life. Thus, your interest rate will be much lower here. Feel free to

pick any rate between $3\%$ and $6\%.$ Use your chosen income and interest rate to determine the amount you will need

to save for retirement.

Now that we have determined how much you will need in your retirement account when you retire we are now ready

to use the Savings Plan Formula to determine how much you will need to deposit regularly to attain that

amount.

EXTRA: Perhaps some of you will get monetary gifts or inheritances upon graduation. You might want to see the effect of

putting that money towards your retirement. You can run separate scenarios and see how this might affect the

payments you need to deposit over time.

There is another thing we need to get started, the APR. What interest rate can you expect to earn as you are saving?

Here, we will investigate the effect of interest rates on your savings. I would prefer

that you do a little research into Kiplinger's, Forbes or Motley Fool to determine a realistic rate of return to expect.

Those sources $($and many others$)$ give historic rates of return on many types of investments, such as mutual funds, the

most common and useful vehicle for this type of investing.

If the thought of reading those magazines or visiting those websites scares you, you may run the calculations for $3$ different

rates: $6\%,8\%,$ and $9\%.$ History has shown the stock market to return an average between $8\%$ and $9\%.$ The $6\%$ value

represents the rate of return a very conservative, or risk averse, investor might expect. We will assume the interest is

compounded monthly for this experiment.

The final element we need to nail down is time in years. This of course, will be a very personal consideration,

and it depends completely on your current age $($or the age you will be when you graduate$)$ and the age you

expect to be when you retire. Alternately, you may simply consider the number of years you plan to work. Here again,

there is room to explore the effects of a single variable on your model. Please run the calculations with at least $3$ different

amounts of years, representing you retiring at age $55,$ at age $65,$ at age $70$ and at any other ages you choose to

investigate.

So we expect to do the calculation using the savings plan formula or the TVM solver at least $12$ times and get $12$

different values for regular deposits you will need to make into your retirement account to make your retirement

dreams come true.

Looking at the scenarios you calculated, determine which ones might make the most sense for your future savings plans.

Please conclude this with a few sentences $($a paragraph at most$)$ about your results.

You can do this project in Word or Excel, whichever you find most useful.