Retirement Planning Assignment

After we’ve concluded the time value of money chapter, you are going to calculate your “nest egg”.  The nest egg is the holy grail of numbers for potential retirees.  It’s the pool of funds you want to acquire to retire, and it needs to sufficiently cover your needs from that point…right up until you “no longer need money”. To complete the assignment, you’ll have to make a few assumptions, as well as acquire a few important pieces of information, and finally make some decisions. 

To begin, you’ll need to assume a retirement age. Some use 65, some 63, but most of us like to think we could retire a bit sooner. At any rate, decide the age you believe you’ll retire, and explain why you believe that’s a possibility.  

Then you’ll need to investigate your life expectancy.  Look to your family for help here, but err on the side of caution and plan for a long life! Once you have an idea of how long you expect to live, you’ll know how many years of money you’ll need in retirement.  For instance, if you want to retire at 55, and most people in your family live until their mid 90’s, you’ll need approximately 35 years worth of retirement money. 

Now you’ll have to make some decisions. How much you need to live off each year!!! You’ll have to factor in everything from basic like food, shelter, clothing, cars…but also travel and medical costs and….  Whatever you spend money on has to be factored in.  Then, you’ll have to adjust for inflation, as well as the changing needs over the period.  For instance, at age 65 you won’t need as much medical budget as you will at 85.  You’ll need credible sources to find inflation data and interest rate info.   Lastly, you’ll have to investigate and decide on your investment style and the rates that will coincide.  These will apply to the “nest egg” when you retire. 

Once you have all the costs adjusted for inflation and on a timeline, you’ll need to discount that back to the retirement year (using NPV function)…and there you’ll have it…your “nest egg”…but I’m not done with you yet.  Now…tell me how old you are currently.  Let’s say you’re 22.  If you’re 22 and retiring at the aforementioned 55, you have 33 years to save up the “nest egg” figure. I want you to work a time value of money problem and tell me how much you’ll need to put into the account each year (annually, not monthly) from now until retirement.  You’ll need to factor in your investment style during the period, to adjust the rate you’ll use to find the future value at retirement.  Sounds fun, no?  Get to it.  I’ll need your explanations and documentation, so don’t forget.   The spreadsheet is required.