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

a. What will Bill’s annual income needs be at age 60?

b. Will the need be for an ordinary annuity or an annuity due?

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

d. How much capital will Bill have at age 60?

e. Will Bill have enough income at retirement?

f. What is the earliest age that Bill could retire utilizing the current savings and investment plan?

g. How much would Bill need to increase his savings on an annual basis to meet his goal of retiring at age 60?

h. Even assuming that Bill increases his savings to an appropriate amount, what are the risks that may affect the success of the plan?

i. How could the capital needs analysis be modified to reduce the risks identified above?