Exercise Two: How much will you need to retire?
The purpose of this exercise is to help you understand how much money you will need at retirement to maintain a reasonable standard of living, taking into account Social Security payments, a company retirement/savings plan and you own personal savings. Make sure you follow the instructions provided to complete this exercise.
Go to Social Security Life Expectancy (Links to an external site.)(https://www.ssa.gov/oact/STATS/table4c6.html) and take a look at the “how long you can expect to live” (this table has been updated through 2017). Remember this estimate is based on current longevity. Your higher educational status, your income potential and medical advances during your career are likely to extend the time you will live. Find your age and then add the number in the column labeled “Life Expectancy” to your current age. Use that information and then make your best guess as to how long you might actually live.
Then go to Quick Calculator (Links to an external site.) (https://www.ssa.gov/OACT/quickcalc/). The Quick Calculator is just that, it provides a quick estimate of what you may expect to get from Social Security when you retire. Enter your date of birth (if there is a date already entered, just delete that date and re-enter your own birth date). You must be at least age 22 to use the calculator. If you are not yet 22 assume that you were born in 1999 or before. Then enter the earnings you might expect to receive (again, if that field is pre-populated, just delete the entry) in your first year of your professional work. Then your future retirement date (remember, you can get reduced payments at 62, full payments at 67, and increased payments if you retire after that, with the maximum occurring at age 70). Lastly, check the box for “inflated (future) dollars”. Then click on “submit request”.
You now have your baseline data: how long you will live after you retire, when you will retire, and your potential Social Security income. Next we will determine how much you will need from other sources.
Go to Bank Rate Retirement Calculator https://www.bankrate.com/calculators/retirement/retirement-plan-calculator.aspx (Links to an external site.) This will provide you with the amount you need to save to reach your desired retirement replacement ratio income goal. In the current work environment, most employers provide a 401(k) and we will assume that is the retirement plan you will participate in. Typically, in a 401(k) you contribute a percentage of your pay (e.g., 6%) and the company will make a matching contribution (e.g., 50% on your first 6% of pay or 3%). Those contributions would go into an investment fund where it would grow until you retire.
Under Retirement Plan Inputs:
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Enter your “Current age”
Enter your desired “Age of retirement”
Enter “Annual household income”. (This is a salary you would expect in your first year of employment.)
Enter your “Annual retirement savings” (This is how much you think you could reasonably save on an annual basis as a percentage of your salary e.g., 4%, 5%, 6%, etc.)
Enter your “Current retirement savings”. (If you have some, great, enter that amount. If not, just enter 0).
Enter your “Expected income increase”. (This is the percentage increase yearly you think your pay will grow from when you start working until your retirement).
Enter your “Income required at retirement”. (This is your replacement ratio. That is, how much of your last year of working pay, in a percentage, will you need to retire comfortably?
Enter your “Years of retirement living”. (This is the number of years you expect to live in retirement. Go back to item 1 above and find how long you are expected to live and your desired age of retirement and that difference is the years you plan on living in retirement).
Now, click on the little pencil in the section on Investment Results, Inflation and Social Security and continue with inputs
Enter your “Rate of return before retirement”. (This is how much your will earn as a percentage annually on your savings while invested before you retire).
Enter your “Rate of return after retirement”. (This is how much will earn as a percentage on your savings while invested after you retire).
Enter an “Expected rate of inflation”. (This is what you think cost of goods and services (inflation) as a percentage will increase until your retirement).
Finally, click on “Include Social Security”. (Ignore the Married box).
Next, click on “Calculate” and after it calculates, click on “View Report”
Use the View Report document to help you answer the following questions:
Questions to answer for Exercise 2
Answer the following questions. Turn them in on Canvas. Make sure your answers are saved as a Word Document.
How long will you live, when will you retire, what is your expected Social Security benefit and how much do you have to save?
How do you feel about how long you will live during retirement given your preferred retirement age and your anticipated life expectancy? Explain why.
What is your reaction to the amount you need to save for retirement to maintain your standard of living? What is your reaction to the “how to meet your goal” recommendations provided in the report? Explain why.
How good an investment are your contributions to Social Security? Consider that you currently pay 6.2% of your pay up to $142,800 and your employer pays the same amount. So, if you make $100,000, a total of $12,400 ($6,200 from you and $6,200 from your employer) goes into the Social Security Trust Fund. Is that a good use of you and your employer’s money? Do you believe Social Security will be there when you retire? Explain why or why not?
List and describe 3 ways you can improve you own personal financial security in retirement?
Provide 3 examples/ideas how HR can work with employees to make sure they understand the need to save and invest?