Explain outcome requires the lowest monthly contribution

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Marybeth and Anneal are beginning to contemplate retirement. They have saved a total of $500,000 for retirement and they are each just 45 years old. They realize that they have not saved sufficiently to be able to retire early, fully retire without some part-time employment, or replace 100% of their preretirement income. But they are willing to explore different avenues.

Marybeth and Anneal have a combined annual income of $125,000 and believe that their salaries will keep pace with inflation at 4% per year. They are also comfortable assuming that the effective annual rate of return for their retirement assets will be 9% before retirement and 6.5% 634 Case Approach to Financial Planning after retirement. For now, Marybeth wants to keep the planning simple, projecting that they will both die in exactly 40 years and that their retirement assets will be depleted with the exception of $100,000 to cover funeral and burial costs. Lastly, they do not want to continue saving after they retire (either partly or fully).

As their financial planner, provide some assistance with these calculations. The two primary options are listed below. Considering all previous information, which outcome requires the lowest monthly (end-of-month) contribution if they also require that their retirement annuity grow by 4% per year to keep pace with inflation? (Ignore the effects of income taxes and social security on the answer.)

a. To retire at age 55 with an income replacement ratio of 60%.
b. To retire at age 65 with an income replacement ratio of 100%.

Reference no: EM13215239

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