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18 March, 11:18

Steven, age 43, earns $80,000 annually; and his wage replacement ratio has been determined to be 80%. He expects inflation will average 3% for his entire life expectancy. He expects to work until 68, and live until 90. He anticipates an 8% return on his investments. Additionally, Social Security Administration has notified him that his annual retirement benefit, in today's dollars will be $26,000. Using the capital needs / annuity method. Calculate how much capital Steven will need.

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  1. 18 March, 15:07
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    Steven will need a capital of $1,061,342.10

    Explanation:

    Annual Savings

    = $80,000*0.8

    = $64,000.00

    Period

    = 68 - 43

    = 25

    Future Value of annual savings

    = FV

    = $64000 * (1 + 0.03) ^25

    = $134,001.79

    Future Value of social security

    = FV

    = $26000 * (1 + 0.03) ^25

    = $54,438.23

    Annual Investment required at age of 68

    = $134,001.79 - $54,438.23

    = $79,563.56

    Present value of a number of cash flows over his retirement years,

    Inflation Adjusted Rate

    = (1.08/1.03) - 1

    = 4.85%

    Period

    = 90 - 68

    = 22

    Capital Required

    = PV (4.85%,22,-79563.56)

    = $1,061,342.10

    Therefore, Steven will need a capital of $1,061,342.10
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