Retirement Planning
 
 

CASE 1
 

Renoldo and Latisha are both 35 years old with a house in Georgia and 2 children ages 3 and 4. Latisha is a domestic engineer and has no salary. Renaldo makes $50k/yr. He has $10k saved in taxable funds, and $50k saved in his 401k. The year is 1998. It is assumed that there will be no social security at retirement.

In 1992, they purchased their home for $140k with a $20k down payment at 7% interest. Renaldo contributes 10% to his companies 401k plan. They are on a very tight budget of about $46.5k projected for 1999 which includes living expenses, mortgage, and taxes. Renoldo is projected to save about $6k in 1999.

Renaldo, not being a sophisticated investor, but willing to do what he can to manage his investments, projects that he can make a return of  8% before retirement, and 7% after retirement.

They plan to send their children to Kenesaw State college at a total cost of about $19k in today's dollars.

Renaldo uses a life span of age 93, with age 99 for his wife. He assumes that he will receive no pension.

When can Renaldo retire ?????

If Renaldo were to retire at 60, he would have a portfolio value of about $1.3M. At his wife's death, there would be a portfolio value of the same amount, $1.3M. This is cutting it pretty close.

If he works until he is 65, his wife will die with about $7M.

If he works until he is 65, but today, he only makes $40k/yr, then he can't retire without dramatically cutting his expenses, or having his wife draw a salary.

If he were able to get a pension as a reward for not early retiring, then their situation would be MUCH improved, and retiring at the earliest possible eligible age appears feasible.
 
 

CASE 2

****** This section is for those currently in debt so give them more debt *********

Duke and Loretta are both 23 years old with a 3 year old child. Duke makes $20k/yr, and Loretta makes $15k/yr. They purchased their home 2 years ago for $50k. They have no savings, and they do not contribute to their 401k plans. They do not plan to fund a college education for their child. It is assumed that there will be no social security when they reach the eligible age.

Their 1999 expenses are projected at $33.7k which includes living expenses, mortgage, and taxes. They  plan on saving/investing half of their excess cash. They assume a 7.5% pre retirement return on their investments, and a post retire return of 7%. They set annual inflation at 3.5%.

They assume they will receive no pension.

Duke and Loretta want to retire at age 62. Will they make it ???????

NO WAY. They will be completely broke in 2-3 years after they retire. Duke and Loretta "ain't got a clue". Even if they work until age 75, they will be broke in 5-6 years (assuming no pension). How can we help out Duke and Loretta ?

OK, lets assume they invest ALL of there excess cash in taxable investments. Can they retire at 62 ?

NOPE. They will be broke in 20 years.

OK, if they put 10% of their earnings in their 401k, and put ALL of their excess cash in taxable investments, that will keep them from going broke for about 25 years after retirement. Well that helped some.

OK, lets say that Duke and Loretta really start focusing on investing so that they can increase their projected returns. Lets say they project an 8.5% return before retirement (a 1% increase), and an 8% return after retirement (a 1% increase), still with that 10% 401k contribution, and ALL of that excess cash going into taxable investments. Might this work ?

VIOLA !!!!! Loretta and Duke are making it ! They are on the road to retirement at age 62 with $1.9M, and Loretta dies with a portfolio of $2.2M. And based on the assumptions, they can do this without a pension ! And they just had to get 1% smarter with investing to do it !!!!! Well, imagine what an additional 1% might do. After all, in 2074, when Loretta dies, $2.2M ain't
gonna be that much at all. Duke and Loretta would be advised to spend their life managing their expenses, and to learn more and more about investing. If they do this, they have a good chance of retiring at age 62. The more they save today, the more they will have sooner.