The Johnsons Consider Retirement Planning
Harry Johnson’s father, William, was recently forced into early retirement at age 63 because of poor health. In addition to the psychological drawbacks of the unanticipated retirement, William’s financial situation is poor because he had not planned adequately for retirement. His situation has inspired Harry and Belinda to take a look at their own retirement planning. Together they now make about $66,000 per year and would like to have a similar level of living when they retire. Harry and Belinda are both 28 years old, and although their retirement is a long way off, they know that the sooner they start a retirement account, the larger their retirement nest egg will be.
(a) Belinda believes that the couple could maintain their current level of living if their retirement income represented 75 percent of their current annual income after adjusting for inflation. Assuming a 4 percent inflation rate, what would Harry and Belinda’s annual income need to be when they retire at age 68?
(b) Both Harry and Belinda are covered by defined contribution retirement plans at work. Harry’s employer contributes $1000 per year, and Belinda’s employer contributes $2000 per year. Assuming a 7 percent rate of return, what would their retirement nest egg total 40 years from now?
(c) For how many years would the retirement nest egg provide the amount of income indicated in Question 1? Assume a 4 percent return after taxes and inflation.
(d) One of Harry’s dreams is to retire at age 55. What would the answers to Questions a, b, and c be if he and Belinda were to retire at that age?
(e) How would early retirement at age 55 affect the couple’s Social Security benefits?
(f ) What would you advise Harry and Belinda to do to meet their income needs for retirement?