Reference no: EM133495941

Assignment: Risk Management and Insurance Project- Retirement Planning- Longevity Risk Project

Objective: To utilize a Web-based retirement-planning calculator to develop 2 retirement plans (REALISTIC and ALTERNATIVE) based on your personal circumstances, and to reflect upon the results. You will need to research a few things before utilizing the calculator.

Background: Time value of money is the math that underlies retirement planning. On-line calculators let you take into account variables such as inflation, the amount you have currently saved for retirement, expected increases in salary throughout your career, spousal income and more. Financial planners use even more sophisticated software.

Step 1: Pre-Quiz

Research the following questions, then take the Retirement Planning Project Pre-Quiz in the Course Home module. The answers to these questions will help inform the inputs you use in the retirement planning calculator discussed later in these Instructions.

Question A. Which are riskier, large-cap stocks or small-cap stocks?

Question B. Which are more likely to pay dividends, large-cap stocks or small-cap stocks?

Question C. Are young adults who are investing for retirement encouraged to take more risk (be aggressive) with their investments, or less risk (be conservative), and why?

Question D. Should your investments after you retire be more risky, less risky, or equally as risky as your investments before you retire?

Question E. When planning your retirement, should you plan for the return on your investments prior to retirement to be >, < or = to the return on your investments after you retire?

Step 2: Chart

Make a CHART using the Word document provided in the page of the Course Home module that contains these Instructions. Download it; do not use any other Word document. Use the Word document provided.

HOW TO COMPLETE THE CHART:

Blueprintincome.com (Personal Life Expectancy) (3 Points)

Begin by going through the written lecture How Long Will You live? in the Course Home module.

Then, for a personalized life expectancy. From the menu across the top, choose Education & Tools; this will bring up a dropdown menu. From the dropdown menu, choose Longevity Calculator at the bottom and complete the brief questionnaire. (NOTE: If the Longevity Calculator does not appear/activate, try a different browser.) When you click on the CALCULATE My Life Expectancy box, the Web site will calculate and present in a large blue circle Your Estimated Life Expectancy. Actually, this Web site uses the term life expectancy somewhat incorrectly, like a lot of people. Technically, life expectancy is how much longer you have to live (years remaining, on average). What the Web site calls life expectancy is actually your total lifespan (current age + years remaining, on average). Regardless, indicate the age shown as Your Estimated Life Expectancy in your CHART on the appropriate line.

To the left of Your Estimated Life Expectancy is a vertical ruler with 2 blue graph lines, one for your peers and a darker one for you. The age at the top of the ruler for you is the age to which you have a 75% probability of living. Scroll down that ruler and you'll see the age to which you have a 25% probability of living. Indicate these ages in your CHART on the appropriate lines. (These ages are also shown at the bottom of the Web page (scroll down), although they are not specifically identified there as the ages to which you have a 75% (left end) and 25% (right end) probability of living.)

Bankrate (Retirement Plan)

Use the retirement planning calculator to develop 2 different retirement plans (REALISTIC and ALTERNATIVE) for yourself based on different sets of inputs.

For the REALISTIC plan, some of your inputs must fall within constraints, as follows:

Annual household income

Project your income after you graduate. The maximum salary you may use is $75,000 ($150,000 if married). You may add investment income to your salary(s) if you indicate in your DISCUSSION (described below) that you included investment income, and describe the source of that income (e.g., rental property, dividends from stocks, etc.) in your Annual household income.

Most graduates' beginning salaries will be lower than $75,000. If you wish to use a higher figure than $75,000 for your salary, you must research salaries at Web sites such as glassdoor.com and indeed.com for positions in your desired occupation in the city in which you plan to live and which are commensurate with the experience you will have; if you will have little or no experience upon graduating, research entry-level salaries. You can also ask parents, family members, and friends who work in the field you are pursuing about starting salaries in that field. If you are currently working and your current employer has indicated what your salary might be if they hire you post-graduation, you may use that figure. Regardless, if you use more than $75,000 ($150,000 if married) for your REALISTIC plan, you must present a compelling discussion (2-5 sentences) of the research you did to arrive at the figure used and why it is realistic to assume you will earn that much. The same requirement applies if you use more than $75,000 for your spouse's income.

Annual retirement savings (% of Annual household income)

The maximum annual savings (in %) you may use for your REALISTIC plan depends on your projected Annual household income, as follows:

projected Annual
household income maximum annual savings
-------------------------------- --------------------------------
$60,000 - $75,000 10% of salary
< $60,000 8% of salary

If you wish to use a higher percentage than shown in the table above for your projected income, you must present a budget indicating your after-tax income (assume 25% of salary goes toward taxes and 20% of investment income goes toward taxes), the amount of major expenses you will have including rent/housing, transportation, loan payments, food, and utilities (phone, Internet, cable, etc.) in order to convincingly demonstrate that you could save more than the maximum shown above. Frankly, most people who earn $65,000 annually would find it difficult to save 10% of their income ($6,500 per year, or about $540 per month). So the percentages shown in the table are probably higher than what most people would be able to save.

Expected income increase

The maximum you may use is 2% more than the rate of inflation your REALISTIC retirement plan is based on. The calculator's default inflation rate is 2.9%; therefore, if you use it, then the maximum expected income increase you may use in your REALISTIC plan is 4.9%. (To change the Expected rate of inflation, click on the + sign at the far right of "Investment returns, inflation and Social Security.")

Most workers' salaries grow at about the same rate as inflation. Getting raises of 2% more than inflation on a consistent basis over the course of a decades-long career would be unusual.

Income required at retirement (% of pre-retirement income you'll live on during retirement)

The minimum you may use for your REALISTIC plan is 70% unless you plan to move in with your children in retirement. If you plan to do that, you must mention this in your DISCUSSION and describe why you think you - or your children - will want/tolerate you moving in with them.

Years of retirement income (needed until death)

Your REALISTIC retirement plan must cover, at a minimum, the period from the age you entered for Age of retirement in the calculator until the age to which you have a 25% probability of living. For example, if your REALISTIC plan assumes you will retire at age 60 and the life expectancy calculator indicates that you have a 25% probability of living until age 89, your REALISTIC plan must be based on at least 29 years (89 - 60) of retirement income needed. Or, if you have a 25% probability of living until age 93, then the REALISTIC plan must be based on at least 33 years (93 - 60).

Financial planners typically base their clients' retirement plans on death occurring between 90 and 95.

Rate of return before retirement

Click on the + sign at the far right of "Investment returns, inflation and Social Security" to access this and the remaining variables.

The maximum you may use is 9%, which would be for someone who is willing to take far more risk with their money than most people.

The inputs for your ALTERNATIVE retirement plan are not constrained by the above limits. You may enter whatever values you wish. However, at least 3 of the values must differ from those used in your REALISTIC retirement plan, to help you appreciate the effects of altering your assumptions.

For each plan, after you have entered the information into the bankrate.com retirement planning calculator, click the blue CALCULATE box. Then click VIEW REPORT to the right of the blue CALCULATE box. Scroll down to the bottom of the report and you will see a table entitled, "Balances by year." The column at the far right, "Ending Retirement Balance," shows for every age through 102 the amount of your retirement savings that remains after the year's spending. As you may be aware, most articles about Americans' preparedness for retirement conclude that the majority are unprepared for it. So if you get results (particularly for your REALISTIC plan) that show you running out of money before you pass away, it shouldn't be terribly surprising.

Complete the CHART to show the inputs (values entered) for your 2 retirement plans as well as each plan's results.

Step 3: Discussion (4 Total Points; maximum 1 page of double-spaced text; rationale for using figures outside the constraints described earlier for your REALISTIC may be in addition to the 1-page maximum)

On p. 2 of the Word document containing your CHART, use complete, grammatically-correct sentences (not bullet points) to indicate the 2 most helpful, surprising or intriguing things you learned from this project and why each was helpful, surprising or intriguing. Responses that are weak compared to other students' comments will receive commensurately lower scores. Also include in your discussion the rationale for any figures used in your REALISTIC plan that fall outside the stipulated constraints.