Tutorial 10: Retirement Planning ***EXAM***

1. A couple wants to accumulate a retirement fund of RM300,000 in current dollars in

18 years. They expect inflation to be 4% per year during that period. If they set
aside RM20,000 at the end of each year and earn 6% on their investment, will they
reach their goal?
Retirement Fund Needed
PV =300,00 0
i=4 %
n=18 years
FV =607,744.9 5

Investment Value
PMT =20,00 0
n=1 8
i=6 %
FV =618,113.0 5

The couple can reach their goal with surplus of RM10,368.

2. A client is concerned about the impact that inflation will have on her retirement
income. The client currently earns RM40,000 per year. Assuming that inflation
averages 5.5% for the first five years, 4% for the next five years and 3.5% for the
remaining time until retirement, what amount must her first-year retirement
income be when she retires thirteen years from now if she wants it to equal the
purchasing power of her current earnings?

F irst Five Years

B eginning Mode
P V =−40,00 0
n=5 years
i=5.5 %
F V =52,278.4 0
6 th¿ 10 th Year
 B eginning Mode
P
=1
Yr
P V =−52,278.4 0
n=5 years
i=4 %
F V =63,604.6 7

11 th¿ 13 thYear
Beginning Mode
P
=1
Yr
PV =−63,604.6 7
n=3 years
i=3.5 %
FV =70,519.6 3

Therefore, her first-year retirement income should be RM70,519.63.

3. Chin Chin has a retirement goal. She plans to retire in 20 years’ time when she is
55. She would like to have a regular retirement income of RM100,000 per year
during her retirement for a period of 25 years. She expects to have the first
withdrawal make immediately upon retirement. She anticipates a return of 6% per
year from any of her investments.

a. Compute the retirement fund that Chin Chin has to achieve when she retired.
Beginning Mode
PMT =100,00 0
i=6 %
n=25
PV =1,355,035.7 5

b. If Chin Chin is able to set aside RM10,000 at the beginning of each year starting
from now, determine whether she would be able to achieve her retirement goal
 based on your answer in Part (a).
Beginning Mode
P
=1
Yr
PMT =10,00 0
i=6 %
n=2 0
FV =RM 389,927.2 7

No, Chin Chin would not be able to achieve her retirement goal, which
RM1,355,035.75 after retirement. If Chin Chin set aside RM10,000 at beginning of
each year would only get RM389,927.27 after 20 years she retires.

4. Peter is going to retire soon. Currently he has RM1,200,000 in his retirement

account. He anticipates a return of 7% per annum on his retirement fund. He
expects to live for another 25 years after retirement. To maintain his lifestyle
during his old age, he would like to make withdrawals at the beginning of every
year from his retirement account. Compute the annual withdrawal amount that
Peter is entitled to from his retirement savings.
Beginning Mode
PV =1,200,00 0
i=7 %
n=25 years
PMT =96,236.0 9

5. Hoon owns a condo worth RM240,000, a car valued at RM25,000, and

miscellaneous assets worth RM7,500. She owes RM185,000 on the condo and
RM15,000 on the car and has no other debts. Her retirement account, in which she
is fully vested, contains RM27,500 in mutual funds. She is insured with a
RM500,000 term life insurance policy. What is her net worth?

RM RM
Asset
Condominium 240,000
 Car 25,000
Miscellaneous Assets 7,500
Mutual Funds 27,500
Total Assets 300,000
Less: Liabilities
Mortgage – Condominium 185,000
Car Loan 15,000
Total Liabilities (200,000)
Net Worth 100,000

6. Joe is planning for his retirement. He has determined that his car is worth
RM10,000, his home is worth RM150,000, his personal belongings are worth
RM100,000. His investment in stock and bond are worth RM300,000. He owes
RM50,000 on his home and RM5,000 on his car.

Joe is planning to retire when he is 55. He is 40-year-old now. He would like to have
a regular retirement income of RM60,000 per year during his retirement. He
foresees that he may live up to age 80, based on his family longevity history. He
expects to have the first withdrawal make immediately upon retirement. He
anticipates a return of 5% per year from any of his investments.
a. Compute and comment on Joe’s net-investment-to-net-worth ratio.

Asset RM RM
Home 150,000
Car 10,000
Personal Belongings 100,000
Investments 300,000
Total Assets 560,000
Less: Liabilities
Home Mortgage 50,000
Car Loan 5,000
Total Liabilities (55,000)
Net Worth 505,000
 Net Investment
Net −Investment −¿−Net−Worth Rati o=
Net Worth
300,000
¿
505,000
¿ 0.59∨59 %

b. Compute the retirement fund that Joe has to achieve when he retired.
Beginning Mode
P
=1
Yr
FV =0
PMT =−60,00 0
n=25
i=5 %
PV =RM 887,918.5 1

Joe has to accumulate at least RM887,918.51 of retirement funds when he retires to achieve
his retirement goals.

c. If Joe is able to set aside RM10,000 at the end of each year starting one year
from now (End Mode), determine whether he would be able to achieve his
retirement goal based on your answer in part (b).
End Mode
P
=1
Yr
PV =0
PMT =10,00 0
n=15
i=5 %
FV =RM 215,785.6 4

Joe can accumulate a total of RM215,785.64 when he retires. However, it is

insufficient for him to achieve the retirement goal, which requires at least
RM887,918.51 retirement fund when he retires. (Joe cannot achieve the retirement
fund needed in part b.)