Saving for Retirement Discussion

Saving for Retirement? Better late Than Never!

"Boy, this is all so confusing," said John as he stared at the papers on his desk. If only I had taken the advice of my finance instructor, I would not be in such a predicament today." John Andrews, aged 27, graduated five years ago with a degree in business administration and is currently employed as a middle-level manager for a fairly successfully grocery chain. His current annual salary of $60,000 has increased at an average rate of 5 percent per year and is projected to increase at least at that rate for the foreseeable future. The firm has had a voluntary retirement savings program in place, whereby, employees can contribute up to 11% of their gross annual salary (up to a maximum of $11,000 per year) and the company will match every dollar that the employee contributes. Unfortunately, like many other young people who start out in their first 'real' job, John has not yet taken advantage of the retirement savings program. He opted instead to buy a fancy car, rent an expensive apartment, and consume most of the income.
However, with wedding plans on the horizon, John had finally come to the realization that he had better start putting away some money for the future. His fiancé, Mary, of course, had a lot to do with giving him this reality check. Mary reminded John that besides retirement, there were various other large expenses that would be forthcoming and that it would be wise for him to design a comprehensive savings plan, keeping in mind the various approximate costs and timelines involved.
John figures that the two largest expenses down the road would be those related to the wedding and down payment on a house. He estimates that the wedding, which will take play in twelve months, should cost about $10,000 in today's dollars. Furthermore, he plans to move into a $200,000 house (in today's terms) after five years, and would need 20% for a down payment. John is aware that his cost estimates are in current terms and would need to be adjusted for inflation. Moreover, he knows that an automatic payroll deduction is probably the best way to go since he is not a very disciplined investor. John is really not sure how much money he should put away each month, given the inflation effects, the differences in timelines, and the salary increases that would be forthcoming. All this number crunching seems overwhelming and the objectives seem insurmountable. If only he had started planning and saving five years ago, his financial situation would have been so much better. But, as the saying goes, "It's better late than NEVER!"

1. What was John's starting salary? How much could he have contributed to the voluntary savings plan in his first year of employment?
2. Had John availed of the company's voluntary retirement plan up to the maximum, every year for the past five years, how much money would he currently have accumulated in his retirement account, assuming monthly deposits and a nominal rate of return of 6% with interest compounded monthly? How much more would his investment value be had he opted for a higher risk alternative (i.e. 100% in common stocks) which was expected to yield an average compound rate of return of 10% (A.P.R.)?
3. If John starts his retirement savings plan from January of next year by contributing the maximum allowable amount into the firm's voluntary retirement savings program, how much money will he have accumulated for retirement, assuming he retires at age 65? Assume that the rate of return on he account is 10% per year, compounded monthly.
4. John figures he will need approximately $120,000 per year (in current dollars) during his retirement. If inflation is expected to average 4% per year and John's savings yield 6% per year in retirement, how long will his retirement savings last?
5. How much would John have to save each month, starting from the end of the next month, in order to accumulate enough money for his wedding expenses, assuming that his investment fund is expecting to yield a rate of return of 10% per year?
6. If John starts saving immediately for the down payment on his house, how much additional money will he have to save each month? Assume an investment rate of return of 10% per year.
7. If John wants to have a million dollars when he retires, how much should he save in equal monthly deposits from the end of the next month? Ignore the cost of the wedding and the down payment on the house. Assume his savings earn a rate of 8% per year (A.P.R.).
8. If John saves up the million dollars by the time of his retirement at age 65, how much can he withdraw each month in equal dollar amounts, if he figures he will live up to the age of 85 years? Assume that his investment fund yields a nominal rate of return of 8% per year.
9. After preparing a detailed budget, John estimates that the maximum he will be able to save for retirement is $250 per month, for the first five years. After that he is confident that he will be able to increase the monthly saving to $500 per month until retirement. If the account provides a nominal annual return of 8%, how much money will John be able to withdraw per month during his retirement phase?