Question

Allison, age 40, earns $95,000 annually; her wage replacement ratio has been determined to be 70%. She expects inflation will average 3% over her entire life expectancy. She expects to work until 67, and live until 95. She anticipates a 7. 5% return on her investments. Allison does not expect to receive any Social Security retirement benefits.

Calculate Allison’s annual retirement needs in today’s dollars

What is the amount of Allison’s first retirement distribution at age 67

Calculate Allison’s capital needed at retirement age 67

Answer 1

a. The retirement needs in todays dollars is $66,500

b. $147,715.2 is the amount of Allison’s first retirement distribution at age 67

c. The capital at retirfement at this age is $2,463,098.27

a. The retirement needs in todays dollars

= Earnings in this period x wage replacement

= 95000 * 0.70

= $66,500

b. The wage at the age of 40 is = 95000 dollars

Inflation rate that is in the economy = 3%

Age difference = 67 - 40 = 27

Adjusted inflation that is based on age

95000x(1+3%)²⁷

= 95000 x 2.22128

= $211,022.46

The replacement ratio = 70%

$211,022.46 x 0.7

= $147,715.2

$147,715.2 is the amount of Allison’s first retirement distribution at age 67

c. The solution for c is contained in the excel document below.

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