Purpose

The purpose of this project is to apply some of the concepts covered in the course. Specifically, the project requires you to develop a retirement plan. The approach you should take when completing this project is that the only funds you receive at retirement are those that you contribute to specific retirement funds—that is, you should assume Social Security will not be available when you retire. In other words, the only funds that you will have available at retirement will include amounts you have accumulated to date in investments that specifically are designated for retirement and any amounts that you accumulate in the future.

Requirements of the Project

You should start planning for your retirement as soon as you begin your professional career. For that reason, the course project is designed to make you think about retirement now by requiring you to develop a simple, yet viable plan for achieving your retirement goals. The following requirements must be included in the project:

I. Occupation/Career Expectations. Provide a brief description of what you expect (hope) your occupation(s) will be from the time you graduate from college until you retire. Include in the description the salary range that you expect to earn at the various stages of your career. Salary estimates can be obtained from a variety of sources, including the Career Center and the library, but most of the needed information can be found on the Internet. To search the Internet, use the key phrase “business salaries” to get a listing of salaries in a variety of business areas (the number of hits will be extraordinary). For a particular area of business, use a key phrase that includes the specific career. For example, if you expect to work in the finance area, the key phrase for your search should be either “finance salaries” or “salaries in finance.” Estimate your salary in five-year increments rather than annually—that is, estimate the average annual salary for the first five years of your career, the average annual salary for the second five years of your career, and so forth. 

II. Investment Horizon and Life Expectancy. Determine how long you expect to be able to contribute to a retirement fund to meet your retirement goals—that is, the number of years you expect to earn a salary in your chosen career. For example, if you intend to retire at age 65, use the number of years from when you first start your career (upon graduation) until the age of 65. This will constitute your investment horizon, which is the length of time that you expect to be able to invest funds to build your retirement “nest egg.” You must also determine the number of years you expect to live after retirement. To estimate this time period, you must complete the following life expectancy quizzes:   

a. http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html. After you get the “Life Expectancy Results,” check each of the boxes in the section titled “Analyze Your Health Risks” to see how much longer you could live if you follow the recommendations that are given. You must turn in with your project (1) the page that gives the life expectancy computation and (2) the page that provides the list of recommendations that you can follow to extend your life.

b. http://media.nmfn.com/tnetwork/lifespan/. Take a print-screen of the last page that contains the results of the “Lifespan Calculator” and include this into your project file.

The life expectancy quizzes will provide a good estimate as to how long you should expect to live given your current lifestyle. To determine your life expectancy, average the results of the quizzes.

III. Risk Preferences. Think about the degree of risk you are willing to take when investing to meet your retirement goals, and then describe your risk preferences. Include in your description a discussion of how you think your risk preferences might change as you progress through your career and get closer to retirement. Part of this process is determining what risks you are willing to take as you build up your retirement fund. To assess your risk preferences, you must complete the following risk tolerance surveys/quizzes. The results will help you determine your risk tolerance level, as well as the composition of a portfolio of investments that is appropriate for you (at this time of your life).

a. You must complete the following risk quiz located on the GetSmarterAboutMoney.ca website. You can print the results by clicking on the “Print” icon that appears at the bottom left portion of the screen after you request the results for the answers that you provide. You may also perform a screenshot and include the results within your paper. The link is below:

Risk Comfort Level: https://www.getsmarteraboutmoney.ca/   

Risk tolerance quizzes provide a good estimate of your tolerance for taking risk when investing. 

IV. Retirement Goals. This is the most important part of the project. In this section, you must describe your retirement goals and determine how these goals can be achieved. You must determine the amount of funds you will need at retirement to achieve the retirement goals you establish and how much you should invest each year to ensure sufficient funds are available at retirement. In this part of the project you must develop the numerical details of your retirement plan. All computations must be completed using the spreadsheet template that is provided with the project. If you do not use the spreadsheet for the computations, your project will not be graded (i.e., you will receive a score of zero for the entire project). For this portion of the project, you must complete the following:

A. Determine the average annual dollar amount that you expect to need during your retirement—that is, determine the amount you want your retirement fund to “pay” you each year during retirement so that you can live the lifestyle you desire. You must explain how you determined that the annual retirement amount you choose is appropriate for your retirement plan. To estimate your financial needs at retirement, first determine the average dollar amount you would need each year if you were retired today. To estimate the needed retirement income in terms of current dollars, you can talk with persons who are currently retired—that is, ask what their living expenses are and what amount of income they need to meet such expenses. After you estimate your retirement needs in terms of current dollars, you must translate the dollars to the years when you expect to be retired. In other words, when determining your income needs (withdrawals from your retirement fund) during your retirement years, you must consider the impact of inflation. You can estimate future inflation by examining historical inflation rates. You can find information about the Consumer Price Index and inflation rates at the following Web sites:

http://neatideas.com/cpi.htm

http://www.pan.ci.seattle.wa.us/financedepartment/cpi/forecast.htm (Click on “Excel File” under Annual U.S. CPI-U to get CPI estimates in spreadsheet form.)

B. Compute the total dollar amount that your retirement fund must equal at the time you retire so that you can withdraw the amount you want to live on each year as determined in Part A of this section. You should assume that the first withdrawal from your retirement account will be the day you retire. For your computations, use an average rate of return (opportunity cost) for all the years that you expect to withdraw funds from your retirement fund. Compute the average rate of return using the information provided in Section IV of the spreadsheet template.

C. Any funds that you currently have invested for your retirement will decrease the future contributions that must be made to your retirement fund during your career to meet your retirement goals. As a result, if you currently have funds invested for retirement purposes, you must compute how much these funds will be worth (grow to) at the time you expect to retire so that you can determine the additional amount that you must contribute to your retirement fund in the future to achieve your goals. For the computations in this section, assume that the rate of return that these funds earn is the average rate that is determined at the beginning of Section IV in the spreadsheet. If you currently have no funds invested for your retirement, for this assignment assume that you actually have $10,000 already in a retirement fund.

D. Compute the contributions that you must make during your professional career to ensure that your retirement investments accumulate the amount of funds needed at retirement. In this section, compute the annual contributions you need to make during your career so that your retirement fund has the amount that you specified in Part B of this section. You should consider any amounts that you now have invested in a retirement fund (use $10,000 if you currently have nothing invested in a retirement fund), because these amounts will decrease the future contributions that you must make to accomplish your retirement goals. For your computations, use an average rate of return for all of the years that you expect to contribute to your retirement fund as the base-case scenario (see Section IV of the spreadsheet template that is required for the project). Compute the contributions that are necessary based on estimates for the average return in three different markets—a normal, or average, market, which is based on the expected returns given in Section IV of the spreadsheet, a lower-than-normal, or below-average, market, and a higher-than-normal, or above-average, market. The return that you use for the above-average market should be 3.1 percent greater than the portfolio return given in Section IV of the spreadsheet; the return that you use for the below-average market should be 2.2 percent less than the portfolio return given in Section IV of the spreadsheet. 

E. Re-compute the contributions that are needed to accumulate the amount of funds required at retirement assuming that you wait to begin your retirement fund so that the number of payments you make (years) will be only 50% of the years reported in Section II, which should have been used for the computations in Part D of this section. In other words, if you expect that you will work for 40 years before retiring, re-compute the required retirement contributions using 20 years—that is, assume that you wait 16 years to start contributing to your retirement fund so that you have only 24 years remaining until you retire.

RetirementProject