Retirement Saving Project

Purpose: To gain an understanding of the affect of start date, rate of return, inflation and taxes on what it will take you to save a set amount of money by the time you retire at age 65.

1. Prepare an Excel table (template available on Pilot) showing your expected income at the following ages: 25, 35, 45, and 55 (if you are older than any of these ages start with your current age, then use the remaining ages above). If you are realistic with your income expectations the exercise will be more meaningful. Start with your salary expectation at graduation and inflate that amount each year to determine your salary at each age level.

2. Assume you need to save an additional $1,000,000 (in today's dollars) to supplement your retirement at age 65.

3. Let's explore the affect of start date and investment rate of return on your retirement savings and lifestyle. Determine what dollar amount you have to save and what percentage of your pay would have to be saved if you earned either 8% or 10% return on your investments.

(E.g., if you started saving at age 25 how much would you need to invest each year earning 8% annually to accumulate $1,000,000 at age 65?) Repeat this same calculation assuming you delayed starting your savings until age 35, 45, and 55. Note: The goal is to accumulate $1,000,000 at age 65. What changes is the number of years you have to save... 40, then 30, 20 and finally 10.

4. Now let's explore the affect of taxes on your retirement income. Assume you are age 65 today and you have achieved your goal of $1,000,000 in retirement savings.

Further assume that you will live in retirement for 30 years until age 95. Also assume that your retirement savings portfolio earns 6% annually and that your average tax rate is 20%. How much can you withdraw annually from your investment savings and still have it last 30 years?

Now take this annual amount and subtract federal income tax from it to establish the actual cash available to buy your retirement lifestyle. Could you live comfortably in retirement on this amount of income? What factors might affect your ability to live comfortably on the calculated amount? Comment and show your calculations.

5. Now let's explore the affects of inflation on your savings goal! In step 4 above, we determined how much annual income could be derived from our $1,000,000 retirement savings assuming we were age 65 TODAY. But how much would you have to save annually to have an amount of retirement saving that has the same purchasing power at your age 65 as $1,000,000 today?

If inflation averages 3% each year during the time before you retire at age 65, how much would you need to save to achieve the equivalent of $1,000,000 today?

In step 2 your goal was $1,000,000 in today's dollars. To maintain the purchasing power of $1,000,000 today how much would you need at retirement at age 65? Repeat the table in 3 above, savings for an inflation adjusted $1,000,000. Show your calculation for the inflation adjusted savings goal.

6. What conclusions would you make regarding when you should begin investing for your retirement, the affect of different investment rates of return, and the affects of inflation on retirement saving plans. Has this project has helped you understand the importance of having goals and having a plan to achieve those goals?