July 11, 2009
Retirement Planning?
Char asked:
A couple will retire in 50 years; they plan to spend about $30,000 a year in retirement, which should last about 25 years. They believe that they can earn 8 percent interest on retirement savings.on retirement savings.
A couple will retire in 50 years; they plan to spend about $30,000 a year in retirement, which should last about 25 years. They believe that they can earn 8 percent interest on retirement savings.on retirement savings.
a. If they make annual payments into a savings plan, how much will they need to save each year? Assume the first payment comes in 1 year.
b. How would the answer to part (a) change if the couple also realize that in 20 years, they will need to spend $60,000 on their child’s college education?
India
Comments on Retirement Planning?
Kendall
I figured you were talking about today’s dollars with the $30,000 so I adjusted it for inflation (3% per year on average) so “the couple” will need $131,517 fifty years from now to have the same buying power that $30,000 has today. I also increased that amount by 3% per year in retirement to maintain buying power through the retirement years.
All that being said, for Part A of your question the couple will need to invest $300 a month, every month, for the next 50 years. This calculation assume it is a tax-deferred. The money pulled out at the end is before taxes. It also assumes a 6% rate of return on investments in retirement.
For part B, you’d need to invest $385 per month, every month, for the next 50 years. This assumes a lump sum withdrawl of $60,000 in year 20.
Hope this helps.