The Johnsons Consider Retirement Planning Harry Johnson's father, William, was recently forced into early retirement at age 55 because of poor health. In addition to the psychological drawbacks of the unanticipated retirement, William's financial situation is poor because he had not planned adequately for retirement. His situation has inspired Harry and Belinda to look at their own retirement planning. Together they now make about $200,000 per year ($110,000 for Belinda and $90,000 for Harry) and would like to have a similar level of living when they retire. Harry and Belinda are both in their early 40s, and they recently checked into their annual Social Security Benefits Statements, which indicated that they each could expect about $32,000 per year in today's dollars as retirement benefits in 25 years at age 67. Although their retirement is a long way off, they know that the sooner they put a plan in place, the larger their retirement nest egg will be. (a) Belinda believes that the couple could maintain their current level of living if their retirement income represented 90 percent of their current annual income after adjusting for inflation. Assuming a 4 percent inflation rate, what would Harry and Belinda's annual income need to be over and above their Social Security benefits when they retire at age 67? (Hint: Use Appendix A-I or visit the Garman/Forgue companion website.) (b) Both Harry and Belinda are covered by defined-contribution retirement plans at work. Harry contributes $5,400 to his plan and his employer puts in $2,700. Belinda contributes $6,600 and her employer puts in $3,300. Assuming a 7 percent rate of return, what would their combined retirement nest egg (now valued at $400,000) total 25 years from now if they keep contributing? (Hint: Use Appendix A-3 or visit the Garman/Forgue companion website.) The Johnsons Consider Retirement Planning Harry Johnson's father, William, was recently forced into early retirement at age 55 because of poor health. In addition to the psychological drawbacks of the unanticipated retirement, William's financial situation is poor because he had not planned adequately for retirement. His situation has inspired Harry and Belinda to look at their own retirement planning. Together they now make about $200,000 per year ($110,000 for Belinda and $90,000 for Harry) and would like to have a similar level of living when they retire. Harry and Belinda are both in their early 40s, and they recently checked into their annual Social Security Benefits Statements, which indicated that they each could expect about $32,000 per year in today's dollars as retirement benefits in 25 years at age 67. Although their retirement is a long way off, they know that the sooner they put a plan in place, the larger their retirement nest egg will be. (a) Belinda believes that the couple could maintain their current level of living if their retirement income represented 90 percent of their current annual income after adjusting for inflation. Assuming a 4 percent inflation rate, what would Harry and Belinda's annual income need to be over and above their Social Security benefits when they retire at age 67? (Hint: Use Appendix A-I or visit the Garman/Forgue companion website.) (b) Both Harry and Belinda are covered by defined-contribution retirement plans at work. Harry contributes $5,400 to his plan and his employer puts in $2,700. Belinda contributes $6,600 and her employer puts in $3,300. Assuming a 7 percent rate of return, what would their combined retirement nest egg (now valued at $400,000) total 25 years from now if they keep contributing? (Hint: Use Appendix A-3 or visit the Garman/Forgue companion website.)
