Planning for Retirement

Tressa Parkes, Melaina Harris, Saida Dahir

Math 1030 Intro to Quantitative Reasoning

12/10/18
 Where do you see yourself when you turn 66? Do you see yourself laying on a beach in a
fancy country club without a care in the world? Or do you see yourself living from paycheck to
paycheck not being able to retire because you don’t have enough funds? These two scenarios are
very possible and the latter is most likely. How can we make sure we are the individuals laying
at the country clubs? Saving. Whether you are 21 or 47, saving for the future is an important
element in everyone's lives. In this essay, we will be discussing saving for retirement and
explaining different scenarios. We will be working on real-world examples and solving them
step by step with instruction and explanation.

Research from Anna Bahney at CNN shows that Americans have a past of poor saving
habits. But the good news is, people are getting better. After the great depression, people started
to realize how important saving actually is. There has been a greater increase in saving habits
from young people. Those ages 18-26 already have knowledge of important saving habits and
understand the need for back up. Along with young people, the middle class has also increased
their saving amounts. Bahney mentions this increase in saving has mostly been due fear of losing
money. Due to fear, Americans are putting more away. But an understanding and wanting to
change savings habits is only a start. How much should I save per month? When should I start
saving? What is APR? These are common questions for those beginning to think about saving
money. To help answer these questions, we will show three individuals of different ages and
monthly deposits and calculate how much they will have at the common age of retirement, 65
years old.

Sarah is currently 30 years old and planning to open a savings account with a 1.85%
annual interest rate compounded monthly. She plans to use the money made off of her savings
account with monthly deposits of $250 for retirement at age 65, 35 years from now. The formula
below will calculate Sarah’s total amount of money in her account when she retires in 35 years.
(1+ APn R ) nY −1
A = PMT × ( AP R )
n
In this equation, A represents the total amount in Sarah’s account, PMT represents her
monthly payments, APR represents the annual interest rate given by her bank, n the amount of
times compounded, and Y the total amount of years Sarah will be using this saving plan.
(1+ .0185 ) 12×35 −1
A = $250 × ( 12
.0185 )
12

A = $147,536.03
By the time Sarah retires in 35 years, she will have saved $147,563.03
Sarah’s APR helped her earn interest on her monthly payments thus creating a higher
amount in her account at retirement than she would have received if she just put money aside
with no interest. But how helpful was her APR? To answer this question we must find the
absolute change/ accumulation; Sarah’s total amount at age 65 minus her total monthly payments
over the 35 years. To find her total monthly payments we simply multiply her monthly deposit
by each month she had the account for by each year she saved; 250 × 12 × 35 = $105, 000.00

Absolute Accumulation = $147, 536.03 − $105, 000.00 = $42,536.00

Sarah saved $42,563.00 more than she would have if it weren't for interest. This looks
like a decent amount considering what Sarah’s deposits were, but that is only relative. Meaning,
if someone who deposited $1,000 per month with the same APR a change of $42,536.00 would
not be as significant. So what is Sarah’s relative accumulation? Meaning what percent more did
Sarah save due to interest? To find the relative accumulation, we divide the absolute
accumulation by the amount deposited.

$42,536.00
Relative Accumulation = $105,000.00
× 100 = 40.5%

Using the same process above, we will now determine how much 20-year-old Josh will
have at 65 years old with the same savings account as Sarah used. The only factor being changed
for Josh is the total number of years, changing to 45 years until he reaches age 65 to evaluate
how much change occurs in the total amount of savings based on age.
12×45
(1+ .0185
12 ) −1
A = $250 × ( .0185 )
12

A = $210, 419.33

By the time Josh retires in 45 years, he will have saved $210,419.33. We will once again
determine absolute and relative accumulation using the same process as above for Josh. Over 45
years Josh deposited a total of $135,000.00 (found by multiplying 250 × 12 × 45).

Absolute Accumulation = $210, 419.33 − $135, 000.00 = $75, 419.33

$75419.33
Relative Accumulation = $135,000.00 × 100 = 55.9%

Following the same process once more, we will determine the amount in 40-year-old
Beth’s account at retirement in 25 years to further examine how the age in which the savings
plan starts effects the total savings. Beth will be using the same savings plan as Sarah and Josh.
 12×25
(1+ .0185
12 ) −1
A = $250 × ( .0185 )
12

A = $95, 266.00

By the time Beth retires in 25 years, she will have saved $95,266.00. For all three
equations, we use the same interest value, beginning deposit, and 12 to represent each month of a
year for a monthly deposit. The only changes we needed to make to the equation were the years
until retirement. To find Beth’s absolute accumulation we once again must find her total amount
deposited, in this case 250 × 12 × 25 = $75, 000.

Absolute Accumulation = $95, 266.00 − $75, 000 = $20, 266.00

$20,266.00
Relative Accumulation = $75,000
× 100 = 27%

We find that when we finish all three equations Josh will have the most money saved up
with a total of $210,419.33. This is because Josh will have his savings account the longest time,
resulting in the highest amount of total saved money. In the article, it mentions how ages 18-96
save the most money and from these three people of different ages, this is exactly what we see.
Josh is 20 years old and in 45 years when he retires he will have $210,419.33. When we compare
this number to Sarah and Beth’s savings, it is larger because Sarah and Beth are older than Josh.
Therefore, Josh’s savings amount is the largest because he has had the most time to save and he’s
more likely to have a conscious mind of savings.

As we have learned, there are many things that contribute to accumulating funds. One of
the most important factors is saving at a younger age. But other elements that play a key role
include; the amount you invest, interest rate, and how often the interest is compounded. When
we discover the person who began saving from a younger age accumulated the most funds, it
proves the point made in the article that when one saves from a younger age their account will
create a higher amount in the end.

Considering the stage we are at in our lives, it makes sense to start wondering what our
potential savings plans could look like for the future. With this in mind, we will begin the
process involved in setting up a savings account. We must determine an affordable monthly
payment as well as the highest interest rate we would be able to receive, based on our monthly
income and expenses. One of us works 5 hours a day, 4 days a week, and gets paid 10 dollars an
hour. Below is the calculation for finding her monthly income. First, we will find how much they
earn per day:
 10 dollars × 5 hours = $50 per day
$50 per day × 4 days = $200 per week
$200 per week × 4 weeks per month = $800 per month

This individual has monthly expenses of $10 for music, $10 for a gym membership, $30
for their heat and light bill, $100 for a vacation savings plan, $40 for gas, $50 on food, and $30
for clothes. In total, this individual has monthly expenses of $270, leaving $530 of her monthly
income. She will put $400 into her savings account each month and leave $130 available. The
online website, Rate Catcher, gave us the information for different savings plans APY’s. The
APY we chose was 2.25%, meaning our savings account will be compounded once a year with
2.25%. This individual is currently 18 years old, and below we will determine her total account
balance at age 65, in 47 years. Because we are using an APY amount, we must first convert APY
to APR.
R 12
1.0225 = (1 + AP
12
)
12
We solve this for APR by isolating the APR in our equation, first by taking the √of each side
and then subtracting one from each side and multiplying by 12.

12
√1.0225 = (1 + AP12
R
)
AP R
1.002 = (1 + 12 )
.00186 = AP
12
R

.0223 = AP R
AP R = 2.23%

Knowing this we can now solve for the total amount saved after 47 years using the savings plan
formula.
12×47
(1+ .0223
12 ) −1
A = $400 × ( .0223 )
12

A = $398, 088.72

Suppose we are one year from retiring, and we take our $398,008.72 and put it into a new
account that compounds once a year with an APY of 2.75% so we can try and live off our
interest from the year and keep a constant of $398,008 saved. To solve this we simply use the
compound interest formula for one year.

1×1
A = $398, 008.72 (1 + .0275
1 )
A = $408, 953.96
 After one year our new savings account will have $408,953.96. We want to know if we
can live off of the interest we accumulated in one year, leaving our original amount of
$398,008.72 to accumulate more interest for the following year. To determine if this is possible
we simply subtract out original amount of $398,008.72 from our new amount of $408,953.96.
When we do this we find out that for the entire year we would be living on $10,945.24 which is
not a liveable amount of money. However, if this person added more per month as they began to
earn more throughout their life, their total amount at retirement could increase thus increasing
the interest they hope to one day live off of.

We will now address an inflation of 2.5% over 47 years. To do this we take our ending
savings amount, $​408,953.96, and multiply it by the number of years we will be saving which is
47. Lastly, we multiply that number by our inflation amount which is 0.025 because we divide it
by 100.
$408,953.96 × 47 × 0.025 = $480,520.903

To find out how much we need to put in to get an inflation at 30,000, we need to find P
which is the principal amount. In order to this, we set our equation up as seen below and solve.

$30, 000 = P × 65 × 0.025

$30, 000 = P × 1.625
$30, 000 ÷ 1.625 = (P ) 1.625 ÷ 1.625
$18, 461.54 = P

We use $30,000 because this is our inflation amount, 65 is how many years and 0.025 is
still our inflation amount. When we plug all this into our equation and solve we get $18,461.54.
We need to put $18,461.54 into our account to get a total of $30,000, taking inflation into
consideration.

If we want to make sure the interest we live off of each year of retirement is $30,000, we
must figure out what our savings account total will be the year before we retire to ensure this
“income.” Since we know the total amount is 30,000 we can fill in A as 30,000 and fill the same
N, Y, and APR, and before. .0225 for the APR, and 47 for Y. From there we solve for the total
inside the parentheses. In this example, the total is $85, 368.40 . Now that we know that amount
we must solve for the principal interest of the new account. We can do that by using the
compound interest formula and solve for A. Since A is on both sides of this equation we need to
combine like terms.​To get A by itself we simply subtracted it from both sides. Following that we
divided the new inflation rate by each side giving us the total of $3, 760, 722.47 . We now can
use the saving plan formula to find the month payments of this account. This is done by plugging
the new A, N, and Y into equation. We will use 46 years instead of 47 because we will be putting
the money into a new account a year before we retired. The monthly payment would have to be
$3, 395.76 . Now that we have this number we can say that it is nearly impossible for Saida to
save this amount of money with the money she is currently early.

$30, 000(1 + .0225)47 = $85, 368.40

.0225 12(1)
A(1 + 12 ) = 1A + $85, 368.40

A(1.0227) = 1A + $85, 368.40

A(1.0227) − 1A = 1A $85, 368.40 − 1A

A(.0227) = $85, 368.40

.0227 $85,368.40
A( .0227 )= .0227

A = $3, 760, 722.47

12×46
(1+ .0275
12 ) −1
$3, 760, 722.47 = P M T × ( .0275 )
12

$3, 760, 722, 47 = P M T × (1107.48)

$3,760,722.47
1107.48= PMT
P M T = $3, 395.76

Methods for saving up for retirement do not stop at a traditional 401K savings plan.
There are many different techniques utilized by the public to accumulate funds. According to the
Us Money News, “There are quite a few ways to save money for retirement without completely
relying on a 401(k) plan.” Bonds, single stocks, mutual funds, rental real estate, annuities, and
more can be used in saving money. Some other ways to make an income while retired is starting
a small business, renting out property, living off interest, and more.

Diversification which according to Investopedia is, “A risk management technique that

mixes a wide variety of investments within a portfolio” is required in all of the methods of
saving if an individual wants to successfully collect funds. If finances are not spread out and one
“puts all their eggs in one basket” the risk of failure will overweigh the rate of return, meaning
the investment is unprofitable. One another hand with higher risk comes higher. The money
made through these methods don’t require a lot of manpower and accumulate off of luck and
interest.

Our goal of this assignment was to take a closer look at retirement and break things down
for specific problems. In the beginning, we started with trying to understand savings plans by
researching this topic a little more. We found out how common savings plans are based on ages
of certain individuals. Younger people tend to accumulate more from their savings as the
importance of saving is more present in younger generations than it was in past generations. We
began looking at savings plans of different aged individuals who use the same account for the
same amount of time to see just how much savings depends on age. Josh at 20 will save more at
65 compared to the others because he started his savings plan at a younger age, conforming the
findings from our research. We wanted to further look at common questions individuals have
about savings plans by working through the beginnings of creating a savings plan for a group
member. We began to uncover the answers to some question such as how much to save each
month, when someone should start saving, and the importance of APR. In relation to how much
someone should save each month, it completely depends on the person's income and how much
they want to put aside. However, the greater the amount put aside the greater the investment and
future interest. As to when someone should start saving, the answer is whenever they are able as
our report has found saving from a younger age will accumulate more in the end. In terms of
APR, individuals should go for the highest amount a bank will give them, as that is the main
factor in increasing their overall interest. There are many different ways to invest in your future
by saving. Some of these ways include: rental real Estate, bonds, stocks, annuities, and more.
Some of these come with a risk so one should have a back up plan in play for saving also. When
we took a look at Sarah’s APR we got to see how high her amount got because of the interest
that was being added. To see how helpful this APR is we find the absolute accumulation. Sarah
ended up saving $42,563.00 because of her interest. Looking at Sarah’s relative accumulation,
we got to see what percent more Sarah saved due to interest, 40.5%. However by creating a
savings plan for a group member we found that even by saving $400 for 47 years and then living
off the interest created from that total, it is not a liveable amount of money. The best way around
this is to start a savings plan soon, and make higher monthly payments as one makes more
money throughout their life. So sit back, realx, and watch the interest rise. You will be thankful
you saved when your laying on a beach towel at 67 drinking a ice cold martini.
 Works Cited

Bahney, Anna. “Americans are saving (a little) more,” ​CNNMoney,

https://money.cnn.com/2017/06/20/pf/emergency-fund/index.html

Bennett, Jeffrey, and Briggs, William. “Using and Understanding Mathematics A Quantitative
Reasoning Approach,” ​Pearson.

Pica, Jacquelyn. “5 Ways to Save for Retirement Outside a 401(k),” ​USNews,

https://money.usnews.com/money/blogs/on-retirement/articles/2018-03-01/5-ways-to-save-for-re
tirement-outside-a-401-k

Rate, Catcher. “Compare Top Savings Accounts of November 2018,” ​Rate Catcher,
https://www.ratecatcher.com/view/savings-rates/?device=c&utm_term=savings%20account&ut
m_campaign=g_773490171&utm_source=google&utm_medium=cpc&cid=773490171&aid=41
007135259&network=g&eng=g&pid=&bankdb=&kid=kwd-295999624709&h_term=Compare+
Top+Savings+Accounts+of+2018+%26+Open+a+New+Account+Today&matchtype=p&adposit
ion=1t4&creative=311343659241&device=c&utm_content=41007135259&pu=1&gclid=EAIaI
QobChMIndCT6Mn83gIVQiCtBh0K-gSUEAAYBCAAEgKZYfD_BwE

Silver, Caleb. “Diversification,” ​Investopedia​.

https://www.investopedia.com/terms/d/diversification.asp