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CHAPTER 14

will receive about \$15,000 per year in retirement benefits, with annual expenses of \$72,000, they will need at least \$57,000 (in today’s dollars; inflation will push that figure higher) per year to help fund their retire- ment, assuming no other sources of income. Once inflation1 is figured in (at a relatively high rate of five percent over 10 years), that \$57,000 per year needed turns into \$92,853 per year! (Annual expenses after inflation are \$117,288.) Neither Jeff nor Mary believes that they will receive any type of retirement pension from their employers. There- fore, they will have to save this money themselves.

# RETIREMENT NEEDS

\$72,000 \$72,000 î€† 1.629 (5% inflation factor) Annual expenses – Social Security = \$72,000 î€‚ \$15,000

= annual expenses = \$117,288

= \$57,000 (annual shortfall)

\$57,000 î€† 1.629

= \$92,853 per year

\$92,853 î€‡ 10% Total needed

= \$928,530 = \$928,530

Jeff and Mary now know that they have an annual shortfall of nearly \$93,000. In order to reach that goal, they will hypothesize their annual rate of return, so that they know how much they need to save on an annual basis. If we estimate a 10-percent annual return on Jeff’s and Mary’s money during retirement, we see that they need to save a total of \$928,530 (\$92,853 ÷ 10) before they retire in order to be able to live on \$72,000 per year in today’s dollars. Continuing with the 10-percent return, their nest egg will yield \$92,853 per year to make up their shortfall. Plus, as long as the principal (\$928,530) isn’t touched, it will continue to generate this income for Jeff and Mary, and will eventually become part of their estate.

1 Inflation factor found in Personal Financial Planning, Eighth Edition, by Lawrence J. Git- man and Michael D. Joehnk. Harcourt Brace College Publishers, 1999.

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