What amount of money does the company need to have set

Reference no: EM132848491

In order to answer Bill's question, you gather the following information from him:

Bill desires an income in today's dollars of $90,000 during each year of his retirement, which is assumed to last 16 years.

One of Bill greatest concerns is inflation. He recently read inflation is expected to average 2.5% annually over the next twenty years. Thinking about the impact of inflation, remember that to maintain $1 in purchasing power, $1.025 would be required next year if inflation was 2.5%.

Bill will be eligible for Social Security. Assuming Social Security benefits increase 2% per year as they have in the past, Bill would receive $24,500 in the first year of retirement, increasing thereafter at the historical rate (2%).

Bill has been told by his employer that at December 31, 2023 he will be eligible for a fixed pension of $32,000 per year (beginning in 2024). This pension is fixed and does not increase in subsequent years.

Bill currently has $20,000 in a certificate of deposit account earning 2% compounded annually which matures on his retirement date. He states that these funds will be made available to support his retirement savings pool as of the date of his retirement (at which time these funds will be combined with the account set up for his three annual payments and will begin earning the higher rate of return).

In addition to the answer to his question, Bill asks that you provide sufficient detail so he may review and understand your analysis.

Question 1: Assume Bill is much younger and wants to retire in 25 years, how much does he need to set aside in each of the next 25 years to meet his goal? Assume his retirement lasts 16 years and other facts above still apply as of the date of his retirement.

Question 2: Bill's employer provides a pension of $32,000 per year, what amount of money does the Company need to have set aside at his retirement date to provide this benefit assuming the funds earn 4% per year? What is the amount required to be set aside if the funds earn 7% versus 4%?

Reference no: EM132848491

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