What is the value after adding the insurance cost

Assignment Help Financial Management

Reference no: EM132021596

Retirement Planning Exercise

Your 21 year old client just graduated from college and started a job with monthly salary of $5,000 per month. He wants to retire when he is 60 years old and wants to start saving for retirement right away. We cannot be sure of how long we live after retirement, but the client wants to be extra careful and save for 30 years of after retirement life. Market expectation for average annual inflation for the future is 1.7% (Let’s assume inflation to be 0 after retirement period). Because of inflation, he will need substantially higher retirement monthly income to maintain the same purchasing power. He plans to purchase a lifetime annuity from an insurance company one month before he retires, where the retirement annuity will begin in exactly 39 years (468 months). The insurance company will add a 2.00 percent premium to the pure premium cost of the purchase price of the annuity. The pure premium is actuarial cost of his anticipated lifetime annuity. He has just learned the concept of time value of money and never saved anything earlier. He will make the first payment in a month from now and the last payment one month before he retires (a total of 467 monthly payments). Show and explain how to perform all necessary calculations for the problem in Microsoft Excel.

a. Given a rate of return of 4% for the foreseeable future, how much does he need to save each month until the month before he retires?

Step 1: What is the first retirement income?

Step 2: What is the value of all the retirement incomes one month before the retirement?

Step 3: What is the value after adding the insurance cost?

Step 4: Monthly savings needed

b. He also wants to take big vacation as soon as he retires. He is anticipating that he will need $50,000 for that (at the end of 467 months of saving). How much should he save every month?

c. What are the non-quantifiable factors (list 5) that he should be aware of? Explain each point.

For example (do not include this as one of your answer): We are assuming the inflation rate is 0 after the retirement. If the actual inflation after retirement is not 0, then the client would need more money in the later years during retirement to maintain the same purchasing power. Which means he did not save enough.

Reference no: EM132021596

Questions Cloud

Evaluate the project escalated dollar ROR : Evaluate the project escalated dollar ROR if both capital costs and operating costs are estimated to escalate at 15% per year from time zero

Conduct a cost-benefit analysis of fire code compliance : Fire code violations have increased in your area over the past 2 years. Local business owners are complaining to city officials about the fines and costs.

Portugal and germany historically : What factors account for the regional inequality as measured in GDP per capita between Portugal and Germany historically

What is natural about the natural rate of unemployment : What is natural about the natural rate of unemployment. How might the natural rate of unemployment differ across countries?

What is the value after adding the insurance cost : how much does he need to save each month until the month before he retires? What is the value after adding the insurance cost?

What factors account for the regional inequality : What factors account for the regional inequality (as measured in GDP) per capita between Germany and Portugal?

What is the underlying ontology of the article : What is the underlying ontology of the article you read? How do you know? Implications for your analysis? The response must be typed.

Quantity produced increases : Over this range of output, the marginal cost curve is higher than/ lover than/ equivalent to the average cost curve.

Detecting account fraud : Underestimation of allowance for loan losses: In the text, Signal not growing in Proportion tot eh increase in troubled loans.

User Account

All Pages