Benedicta’s Retirement Planning

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%
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.

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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
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.

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