Case Study

Case Study

Bill, age 45, wants to retire at age 60. He currently makes $60,000 per year. He has an objective to replace 80% of his pre-retirement income. He wants the retirement income to be inflation adjusted. Bill has an investment portfolio valued at $150,000, which is currently earning 10 percent average annual return. Bill expects inflation to average 3 percent and, based on his family health, he predicts he will live to age 90. Bill is currently saving 7 percent of his gross income at each year-end and expects to continue this level savings amount. Bill wants to ignore social security benefits for purposes of planning.

Remember to show your work to receive partial credit in case the final number is incorrect.

1. What will Bill’s annual income need be at age 60?

Salary $60,000

WRR 0.80

$60,000 * .80 = 48,000

n = (60-45)= 15

i=3

PV = $48,000

PMT=0

FV = $74,782.44

2. How much total capital will Bill need at age 60?

3. How much will Bill have at age 60?

n = 15

i = 10

PV = $150,000

PMT = $4,200.00 (7% * $60,000)

FV = $760,031.65

4. Will Bill have enough? NO

n=30

i= 6.79612= {(1.10/1.03)-1}*100

PMTAD = $74,782.44

FV = 0

PV = $1,011,685.49

5. What risks do you see with Bill’s current plan?

The main risks that I see are that he is in danger of not having enough at retirement. There are many variables that are against him. He is not saving enough, inflation may be greater than what he estimates, and he may not make the 10% estimated ROR. Should there be any interruptions in his income due to health or anything like that his retirement may be in real danger.