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.
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|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%|
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|
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.
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|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|
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.