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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 plan (whether a
defined benefit pension or a plan like a 401(k), and personal savings.
Given your age and probable legal and social changes over your working
life the results may be too optimistic.
- Go to http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html.
Calculate how long you can expect to live. Remember this estimate is
based on current longevity and advances in longevity that are known to
be occurring. Medical breakthroughs during your working life are likely
to extend the time you have left. [You may want to run the calculator
twice, once with entirely accurate data and once with lifestyle data
(exercise, seatbelt usage, etc.) at the ideal. This will give you an
idea of the impact of lifestyle on longevity.] Write down your expected
- Go to Quick Calculator or Social Security Online Calculator.
The Quick Calculator is just that – it provides a quick estimate of
what you may expect to get from Social Security when you retire. The
Social Security Online Calculator is more complicated, and allows you to
enter in a salary history. If you are not currently working, put in the
salary you expect to get the year you graduate. Either calculator will
give you an estimated Social Security payment you will get when you
retire. You can get reduced payments at 62.5 years, regular payments at
age 67, and increased payments if you retire after that, with the
maximum occurring at age 70. Just to give you a frame of reference, if
you retire at age 70 and have earned the maximum amount taxed for social
security, you will currently get about $3350 per month, or about
- Note when you would like to retire.
Historically the average retirement age has been around 55, but it has
been going up in recent years.
- You now have baseline data: when
you will retire, how long you have to live after you retire, and Social
Security income. You now need to determine how much you need from other
- Go to Choose to Save®.
This will provide you with the amount you need to save to reach some
specified replacement income. If you expect to work for a company that
gives a defined benefit pension, consider that the typical pension pays
out about 30% of the average of the three highest years of the last five
years of salary. Thus, if you expect to earn $150,000 on average of
these three years your company pension would be $45,000 per year.
However, many companies are dropping defined benefit pension plans and
moving to defined contribution plans, such as a 401(k). In a typical
401(k) plan the company makes a 50% match to the first 5% of your salary
you put in these tax-deferred plans. If you make the standard
contribution on a $40,000 salary, you would $2000 and the company would
contribute half of that, or $1000. The money would go into an investment
fund where it would grow until you retire or reach age 70, when
required distributions begin.
- An Alternate to “Choose to Save” is the http://money.msn.com/retirement/retirement-calculator.aspx.
It makes slightly different assumptions but is worth using as well. It
gives you a graphic view of the shortfall in income you will face if you
don’t save enough now. To answer question “e”, below, you will need to
use the MSN Money site.
Assignment: To turn in. Answer the following questions to turn in for this assignment:
- Given your life expectancy and your preferred retirement age, how long will you have to live during retirement?
- What is your reaction to the amount you need to save for retirement to maintain your standard of living?
good an investment do you think your contributions to FICA (Social
Security taxes) are? Consider that you currently pay 6.2% of your gross
salary up to $106,800 and your employer pays the same amount. (You pay
an additional 1.45% on all earnings for Medicare, again, matched by your
employer.) Thus, if you make $40,000 a total of $4960 goes into the
Social Security Trust Fund.
- How can HR work with employees to make sure they understand the need to save?
401(k)s or other defined contributions plans allow you to make
additional tax-deferred contributions to the plan, Using “Retirement
Planner – MSN Money” consider what would happen if you make a 7%
contribution instead of 5%. A 10% contribution instead of 5%. Note the %
increase in retirement income you can expect from both these actions.
I do not want to see personal financial data. The only number I have
asked for, in “e,” is a % increase and reveals nothing about your
personal financial status.
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