This is a real world demonstration to determine the amount of savings you should have put away for your retirement. This is a dynamic and powerful exercise to demonstrate the power of the time value of money. Set your own financial goals and use this worksheet to understand how much you will need to have saved by retirement age to live the lifestyle that you have planned for yourself.
First, complete page one of the worksheet first by closely following the directions of each question. Much of the assignment is subjective based on your own financial goals, but the math is objective - and you must show your work to demonstrate your understanding of the assignment.
Next, complete #9 of the worksheet using your best estimate of you future earnings. If the time period set forth isn't appropriate due to your age, feel free to adjust the timeframes as needed.
Input the values from #9 on the worksheet into the Retirement Excel Template (Type directly over my values. They are there for illustrative purposes). It is important the values from the spreadsheet match the values you input into the Excel template. Also, don't forget to include the amount of savings you estimate to have accumulated. The worksheet is designed to be flexible to meet your own individual goals. If you are an older student, then change the variables accordingly or you may create a completely fictional scenario. Just be sure that if you change time (n) or rate (r) then you also change the associated interest factors.
The spreadsheet will then calculate much of the work for you. But please calculate the very last box at the bottom of the Excel template using your financial calculator. The variables are there for you. This assignment isn't designed to have you crunch a lot of numbers. You're doing enough of that type of practice inside of Connect. Rather, this exercise is the practical application of what you have learned about the time value of money from Chapter 9.
Go back and complete the remainder of the worksheet based on the values computed in the Excel template.
The Excel template must be submitted with the completed worksheet and the figures in both the worksheet and template must be consistent with one another. Discrepancies will be a cause for point deductions. Also, proofread carefully because I will also deduct points for spelling, punctuation, and grammatical errors. Your submission must include both a completed retirement worksheet as well as the Excel template and be sure the numbers between the two documents match accordingly.
Retirement Worksheet
1. After my education is complete, my career plans include:
____________________________________________________________________________________
2. I am currently working _________hrs./week at _______________________ where my primary job
responsibilities include________________________________________________________________.
3. I believe / don’t believe this job will assist me in achieving my long-term career goals.
4. YOUR ESTIMATE/BEST GUESS: I intend to withdraw $_________________ at the END of each year from my retirement account to support my lifestyle.
Input how much you think you need to live comfortably in your retirement years. To help you with your estimate, experts estimate you should plan to live on approximately 70% of your ending salary in your retirement years in order to maintain your standard of living. (Assume no pension or Social Security benefits.)
5. When I retire, my goal is to have saved $_______________________ in a retirement account. I believe these funds will be sufficient to maintain my desired lifestyle through my retirement years. One approach is to take your figure from #4 and multiply it by 20 years, assuming a 20 year retirement. There are no wrong answers here. Input this figure BEFORE you calculate anything on the Excel template. Just take a guess. What do you think is a reasonable amount to have as your nest egg on the day you retire (age 65 in this example) that would support the annuity withdrawal from the previous question.
6. Based on my total retirement savings from question #5, assuming those funds are invested at 5% compounded annually, I am able to withdraw $______________ from my retirement fund each year over the next 20 years. Show all inputs below. Compute with the financial calculator (solve for PMT).
INPUTS: N =
I/Y =
FV =
PV =
PMT =
7. In order to meet your retirement goals (withdrawing an annuity stream for 20 years) from question #4, how much would you need to have in your retirement account at age 65? In other words, based on the amount of the annuity from question #4, the total retirement savings account must have an actual balance of $______________ in the account on the day of retirement at age 65 assuming a rate of 5% compounded anually. This is a present value of annuity calculation (CPT PV). (Show all inputs below.)
INPUTS: N =
I/Y =
FV =
PV =
PMT =
8. Review your answers from questions #4-#7. This is just the “off the cuff” approach to retirement planning. How close were you to “reality”? What conclusions can you draw based on your estimates and how they compare to your calculations in #6 & #7?
____________________________________________________________________________________
Now let’s take a more analytical approach to retirement planning:
9. INPUT INTO TEMPLATE: It is imperative that the figures below match your BLUE figures on the Excel template, including the EARLY SAVINGS.
I hope to have $___________________ of retirement savings in the bank by age 30.
(EARLY SAVINGS ON TEMPLATE)
I hope to earn $___________________ per year when I’m 30.
I hope to earn $___________________ per year when I’m 40.
I hope to earn $___________________ per year when I’m 50.
I hope to earn $___________________ per year when I’m 60.
10. I PROMISE that I WILL SAVE 15% of that salary each year, and I expect to retire at age 65.
11. If my life expectancy is age 85, my retirement years will total ________.
12. SHOW WORK IN THE TEMPLATE: Assume I invest 15% of my salary annually based upon the above salaries at a savings rate of 6.5% compounded annually. At retirement age, my nest egg (including the retirement funds I had saved by age 30) would total:
$_______________________ (from Excel template)
13. SHOW WORK IN THE TEMPLATE: Based on the amount of funds in your retirement account (question #12), how much can you withdraw each year during retirement? In other words, what is your annual annuity that you will be able to live on to support your lifestyle?
$_______________________ (transfer the value from the COMPUTE box on the Excel template here which you are to solve using your financial calculator. It should be very similar to the other boxed values computed using the interest factor and formula.)
14. With a disciplined savings plan I know I can meet my long-term financial goals: TRUE/FALSE
15. Please comment on this exercise. What are your thoughts/conclusions?
RETIREMENT WORKSHEET TEMPLATE
The blue numbers are variables but must be changed to match your worksheet figures. You may also change the number of compounding periods (n) and the interest rate, but if you change "n" or "r", you will also have to adjust the interest factors accordingly.
First, you have to calculate the future value of your DIFFERENT annuities since you're saving EACH YEAR under different assumptions.
Age Salary Annual Savings @15% r n FV/Fa FVA
30-39 50,000 7,500 5.00% 10 12.5779 $94,334 at age 40
40-49 75,000 11,250 5.00% 10 12.5779 $141,501 at age 50
50-59 100,000 15,000 5.00% 10 12.5779 $188,668 at age 60
60-64 125,000 18,750 5.00% 10 5.52563 $103,606 at age 65
The above represents a future value of an annuity calculation because you're saving EVERY year. Now, you have to take LUMP SUM FUTURE VALUE calculations to bring these figures from age 40, 50, and 60 (respectively) to your retirement age of 65.
Age Accumulate Savings r n FVif FVa
40 94,334 6.50% 25 4.8277 $455,417
50 141,501 6.50% 15 2.5718 $363,913
60 188,668 6.50% 5 1.3701 $258,495
65 103,606 6.50% 0 1 $103,606 $1,181,430
EXISTING SAVINGS:
Do the same with your existing savings (but n= 35):
Early Savings 5,000 6.50% 35 9.0622 $45,311
Total in Savings Account @ Age 65 $1,226,741
Assuming a 20 year retirement, how much can you withdraw each year so that at the end of 20 years, the balance will be $0?
YOU CAN SOLVE FOR YOUR ANNUITY WITHDRAWAL AMOUNT IN ONE OF THREE WAYS:
1. Using a sinking fund interest factor where you apply that interest factor to the future value.
1st: Do a lump sum FV calculation to carry the total savings in the account (at age 65) 20 years into the future (from age 65-85)
n=20 r=5% PV= $1,226,741 FVif=2.6533 $3,254,913
Assuming you didn't spend ANY of your retirement, this is the amount accumulated in your retirement fund at the age of 85. But, you want to draw down that account balance so that in 20 years, there's a $0 balance at age 85. It's a sinking fund problem. 2nd: Now do a sinking fund calculation
Future Value $3,254,913 Sinking fund table factor. 0.0302 when n=20, r=5% $98,298
2. Solve for the annuity by the following formula: PV/PVfa=A $1,226,741 ÷ 12.462 $98,439
3. On a financial calculator, solve for PMT: PV $1,226,741 CPT PMT COMPUTE
FV $0 Based on the assumptions above, this is
I/Y(r) 5 The amount you will be able to withdraw
n 20 per year from your retirement account.
*Your answers may differ slightly for each different method (though not statistically significant) because of the rounding involved when using the interest factor tables
