Retirement Planning: Analysis and Basic Problems

Topic: Retirement Words: 856 Pages: 4

Benedicta is planning for his retirement based on his current savings and salary. Table 1 indicates all assumptions that are taken into consideration for retirement planning. He has savings, which are considered as savings at the start of the plan. His salary is expected to increase by 2% every year till he reaches his retirement age of 65 years. It is also indicated that he will make contributions to its savings every year. Moreover, his employer will also contribute to this amount. The basic problem with this retirement plan is that it does not take into account expenses that Benedicta will incur each year before he reaches the retirement age. If this amount is deducted from savings, then the entire analysis would change.

Current age	37	Current savings	259,000	Rate of return	4%
Retirement age	65	Current salary	145,000	Increment	2%
		Annual expenses after retirement (current)	90,000	Rate of return (after retirement)	3%
		Own contribution to a retirement fund	6%	Income tax post-retirement	15%
		Employer’s contribution	6%	Inflation	2%
		Other contribution	6,000

Table 1: Assumptions for Retirement Planning.

Table 2 indicates that Benedicta will earn interest on the savings at the end of the year, which will be added to the savings at the start of the next year. It is noted that Benedicta will have total savings of $1,152,304 by the age of 65 years. It is the amount that would be available to them during his retirement period. Overall, it could be reported that his savings will increase by 345% in the next 28 years.

Age	Salary	Savings at the start of the year	Contribution	Expenses during the employment period	Savings at the end of the year	Interest Earned	Total Amount
37	145,000	259,000	23,400	–	282,400	11,296	293,696
38	147,900	282,400	23,748	–	306,148	12,246	318,394
39	150,858	306,148	24,103	–	330,251	13,210	343,461
40	153,875	330,251	24,465	–	354,716	14,189	368,905
41	156,953	354,716	24,834	–	379,550	15,182	394,732
42	160,092	379,550	25,211	–	404,761	16,190	420,952
43	163,294	404,761	25,595	–	430,357	17,214	447,571
44	166,559	430,357	25,987	–	456,344	18,254	474,597
45	169,891	456,344	26,387	–	482,731	19,309	502,040
46	173,288	482,731	26,795	–	509,525	20,381	529,906
47	176,754	509,525	27,211	–	536,736	21,469	558,205
48	180,289	536,736	27,635	–	564,370	22,575	586,945
49	183,895	564,370	28,067	–	592,438	23,698	616,135
50	187,573	592,438	28,509	–	620,947	24,838	645,784
51	191,324	620,947	28,959	–	649,905	25,996	675,902
52	195,151	649,905	29,418	–	679,324	27,173	706,497
53	199,054	679,324	29,886	–	709,210	28,368	737,578
54	203,035	709,210	30,364	–	739,574	29,583	769,157
55	207,096	739,574	30,851	–	770,426	30,817	801,243
56	211,238	770,426	31,349	–	801,774	32,071	833,845
57	215,462	801,774	31,855	–	833,630	33,345	866,975
58	219,772	833,630	32,373	–	866,002	34,640	900,642
59	224,167	866,002	32,900	–	898,902	35,956	934,858
60	228,650	898,902	33,438	–	932,340	37,294	969,634
61	233,223	932,340	33,987	–	966,327	38,653	1,004,980
62	237,888	966,327	34,547	–	1,000,874	40,035	1,040,909
63	242,646	1,000,874	35,117	–	1,035,991	41,440	1,077,431
64	247,499	1,035,991	35,700	–	1,071,691	42,868	1,114,559
65	252,449	1,071,691	36,294	–	1,107,985	44,319	1,152,304

Table 2: Pre-Retirement Planning.

Table 3 indicates that Benedicta will have no salary. The savings at the start of the retirement year will be the savings at the end of the retirement age. It is also noted that his expenses of $90,000 were reported in current dollars. They will be adjusted for determining their future value by using the following formula.

Future Value = Present Value * (1+Inflation Rate)^(Retirement Age – Current Age)

Table 3 also indicates that Benedicta will earn interest on savings after paying for his expenses. The savings before taxation are provided in the following table as gross savings at the end of the year. The tax implications for Benedicta include the tax amount related to the interest earned by him every year. The total amount after tax is calculated by deducting the income tax paid from gross savings at the end of the year. The table also indicates that Benedicta’s net savings will deplete and become negative as he will reach the age of 73 years. Therefore, it could be suggested that Benedicta’s retirement planning is not effective as it only provides funds for seven years after his retirement.

Age	Savings at the start of the year	Expenses of the current year	Savings after expenses	Interest earned	Gross savings at the end of the year	Income tax on interest	Total amount after tax
66	1,152,304	159,826	992,478	29,774	1,022,253	4,466	1,017,786
67	1,017,786	163,023	854,764	25,643	880,407	3,846	876,560
68	876,560	166,283	710,277	21,308	731,586	3,196	728,389
69	728,389	169,609	558,781	16,763	575,544	2,515	573,030
70	573,030	173,001	400,029	12,001	412,030	1,800	410,230
71	410,230	176,461	233,769	7,013	240,782	1,052	239,730
72	239,730	179,990	59,740	1,792	61,532	269	61,263
73	61,263	183,590	(122,327)	(3,670)	(125,996)	(550)	(125,446)

From the analysis provided above, it could be indicated that the two most important factors to be considered in the retirement planning are earnings and contributions of an individual. If the individual receives high earnings and saves more each year, then he/she will have more savings for the retirement period.