FIN 450 – Your 25 year old client wants to retire when he is 65 years old
Subject: Business / Finance
Your 25 year old client wants to retire when he is 65 years old, and have a retirement income equivalent to $4,000 per month in today’s dollars. We cannot be sure of how long we live after retirement, but the client wants to be extra careful and save for 25 years of after retirement life. Market expectation for average annual inflation for the future is 1.7%. 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 40 years (480 months). The insurance company will add a 3.00 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 479 monthly payments).
Given a rate of return of 5% for the foreseeable future, how much does he need to save each month until the month before he retires?
If he decides to save $200 more every month instead, how much can he receive as the first month retirement income?
Are there any non-quantifiable factors that he should be aware of?