Arnone notes that planning for retirement has become more important today because many employers have moved away from the defined benefit pension plan to a defined contribution plan (p.3). This means that employees are tasked with the responsibility of ensuring that they save enough during their working life in order to have sufficient savings to meet their post-retirement expenses.
Some of the common mistakes individuals take when planning for retirement is to overestimate how much they will receive from the social security or underestimate how long they will live (Arnone 5). Another major mistake individuals planning for retirement make is ignoring inflation. When individuals ignore inflation it means that they will understate the dollar amount of the expenses, consequently they pension income will not be sufficient to cover for all the post-retirement expenses. In my plan for retirement I have assumed that I will live for twenty years after retirement and that inflation will average at 2% per year.
I intend to graduate and become a financial analyst with a starting salary of $80,000 per year at the age of 25. My retirement plan is based on the following assumptions and estimates:
Income – my income will grow at an average of 3% per year.
Retirement age – I will retire at the age of 65 years
Inflation – I expect an average inflation of 2% per annum
Return - I expect an average return of 5.5% on my retirement fund
My expenses after retirement are as follows:
Housing costs – I will have finished paying off my mortgage by the time I retire and the only expense that I will be incurring on housing is as follows:
$
Real estate taxes 8,000
Maintenance and repair 2,000
Home Insurance 8,000
Total per annum. 10,000
Personal Expenses
Grooming 1,560
Clothing 7,800
Holidays 20,000
Auto expense 2,400
Auto Insurance 600
Total personal expenses per annum 34,360
Daily living expenses
Groceries 2,600
Entertainment 10,400
Utilities 7,800
Telephone 1,560
Total Daily living expenses 22,360
Medical expenses
Prescription drugs 2,600
Medical Insurance 5,200
Total 7,800
Annual retirement income required 82,520
Estimated social service and other income 48,000
Annual income shortfall -34,520
After projecting my retirement expenses in present value terms, I realized I had a shortfall of $34,520 per year in present value terms. I decided that I will enroll in a defined contribution plan where I will contribute 5% of my basic employer with my employer matching my contribution. The funds will earn 5.5% return per annum. By the time I attain the age of 65 years my retirement fund is projected to have grown to $663,918.23 which falls short of the target value by $61,425.37 by the time I am the age of 65 years. When I discount the shortfall at 5.5% over a 40 year period, that is when I am starting to work the shortfall works out to be $7,215.22. In order to take the maximum benefit of the time value of money I chose to pay the shortfall in my first year of work.
Sullivan suggests that one should plan to have between 75-80% of their pre-retirement earnings in order to live comfortably (p.18). My projected earnings after retirement will be 73% of my pre-retirement earnings. I believe I will be comfortable since I will not be having rent or mortgage expenses, or high commuting expenses. I do not intend to work after I retire save for community engagements such as giving public lectures at my former school.
Works cited
Arnone, William J. Ernst & Young's Retirement Planning Guide. New York: Wiley, 2002. Print.
Sullivan, Kevin. Managing Income In Retirement: Planning With Purpose. Bloomington: Author
House, 2012. Print.
Financial Calculators used
Spreadsheet123,. "Retirement Budget Planner Free Template For Excel". N.p., 2016. Web. 29 Mar. 2016.
T.Rowe Price,. "Retirement Calculator & Financial Retirement Planner - T. Rowe Price".
Www3.troweprice.com. N.p., 2016. Web. 29 Mar. 2016.
Vertex42,. "Download The Annuity Calculator". Vertex42.com. N.p., 2016. Web. 29 Mar. 2016.
