Financial Retirement Project
The median annual salary in the US is around $70,000. A common retirement goal used to maintain the same standard of living is to have between 60% and 80% of your pre-retirement annual income for each year of retirement. Without taking raises and inflation into consideration we can use a simplified method to determine the amount of money needed to retire at a particular age. For the purposes of this assignment, we will use 70% of your selected pre-retirement annual salary to maintain your standard of living in retirement. We will look at four scenarios.
1) Begin saving from 25 to 65
2) Begin saving from 35 to 65
3) Begin saving from 45 to 65
4) Begin saving from 50 to 65
Keep in mind that, many people use a 401(k) savings account for retirement that has a current maximum annual contribution limit of $17,500. This is why it is a bad idea to start saving after age 50 while expecting to retire at age 65. A conservative average annual rate of return for a 30 year period on a 401(k) is 6%. We will use that in our calculations. Your retirement goal will be to retire at 65 and save enough money to make monthly withdrawals for 20 years. The average life expectancy in the US is 79, but we are using an expected life of 85 years. Here is an example using the median income of $55,000.
First, we will figure out what 70% of $70,000 is to find the necessary amount of money to have for each year of retirement while not changing our standard of living.
.70*55000=38500
So, we want to have $38,500 per year of retirement. Since we plan on making monthly withdrawals, we will divide that by 12.
38500/12=3208.33
We will need $3,208.33 per month of retirement. Now we need to find the Amount Needed to Provide Equal Periodic Payments. Since we will retire at 65 and expect to live until 85, we will say t = 20. Using a conservative average rate of return of 6%, we will say r = .06. Since we need a monthly income of $3,208.33 in retirement, we will say R = 3208.33. Here is the formula:
P=R[(1-(1+r⁄m)^(-mt))/(r⁄m)]
P=3208.33[(1-(1+(.06)⁄12)^(-12*20))/((.06)⁄12)]
P=$447,821.18
Now we have it that $447,821.18 is the amount needed to provide equal periodic payments of $3,208.33 per month for 20 years at an average annual rate of 6%. Next we need to find out how much money we need to deposit per month starting at age 25 and ending at age 65 to build up the necessary $447,821.18 to provide our retirement income. Again, we will assume a conservative 6% average annual rate of return. We will use the Formula for Periodic Payments of a Sinking Fund where A = $447,821.18, m = 12, and t = 65 - 25 = 40. Here is the formula:
R = {A (r/m)} / {(1 + r/m)mt - 1}
R = {447821.18 (0.06/12)} / {(1 + 0.06/12)12*40 - 1}
R = $2224.87
So, if we start saving $224.87 per month from age 25 to 65 we can achieve our monthly retirement income of $3208.33 for the last 20 years of life assuming an average annual rate of return of 6%.
Now, if we begin to save for retirement at age 35 instead of 25, t = 65 - 35 = 30. We only need to change t from 40 to 30 to see how much we need to save each month to obtain our retirement goal.
R = {447821.18 (0.06/12)} / {(1 + 0.06/12)12*30 - 1}
R = $445.81
Likewise, if we begin to save for retirement at age 45 all we need change is t = 20 to get a necessary monthly savings of to fund our retirement account. And if we begin to save at 50 . It is noteworthy to mention that these amounts of monthly savings for retirement do not take into account Social Security benefits that will contribute to our retirement income nor do they take into account an employer 401(k) contributions matching program which is common and usually between 3% and 5%. Both of these considerations will make the necessary monthly savings actually lower, but for the sake of simplicity, we will ignore them.
Now that you see how to perform the calculations, please use your selected pre-retirement annual income to determine how much you should save each month when you
1) Begin saving from 25 to 65
2) Begin saving from 35 to 65
3) Begin saving from 45 to 65
4) Begin saving from 50 to 65
For 1) through 4), assume you will want 70% of your pre-retirement annual income for your retirement years, while maintaining a 6% average rate of return, with a life expectancy of 85 years. For part 5) I will give you more freedom to explore retirement on your own terms. Select any age to begin saving and any age to retire. Then select your own retirement monthly income for your retirement years and choose your own life expectancy, though I would like you to be reasonable in your choices. Still assume a rate of return of 6%.
Please model the way you turn in your answers by the following example:
Page 1
Annual pre-retirement income of $70,000.
1) Begin saving $224.87 per month from 25 to 65
2) Begin saving $445.81 per month from 35 to 65
3) Begin saving $969.22 per month from 45 to 65
4) Begin saving $1539.86 per month from 50 to 65
Monthly retirement income of (your choice)
5) Begin saving $70,000.00 per month from (age you want to start (21)) to (age you want to retire(65))
Pages to include in your Project
Research the career that you plan to pursue after completing your degree at EWC. Find a company that you would like to work for. Describe in one page summary the financial benefits of working for that company (i.e. employee benefit package- retirement, medical, 401ks etc.). Find out what the average salary for the position that you would like to have at the company. Use this salary to calculate your retirement income. Provide a typed report along with your calculations. Attach a reference page on the company that you would like to work for along with a description of the job position. The length of this project is approximately 3 to 5 pages (and should include the following:
1. One page summary of the potential career that you want to pursue with a company of your choice including the job description of what you will be doing for that company.
2. Calculations: Show all of your work for parts 1) through 5) on additional pages. I do not want any of the work shown on page 1.
3. References: This should showcase the company profile and the benefit package that the company offers. You may attach the website page or cite the website page of the company.