5 Lump Sum Shortfall Future
1
t
LS
Inputs 27 0.9615 86584
(Use BEGIN function) N I/Y PV PMT FV
Solution Press
$2,070,054
a) Smiths need a lump sum of $2,070,054 at the beginning of retirement.
b) The amount of accumulated savings at the beginning of retirement is $293,979.
2. Analysis
a) Is their retirement plan achievable as is?
b) If not, what are the alternatives that could help reconcile needs and resources?
c) What is your recommendation?
The retirement plan is not achievable because required yearly savings represent high
Excel Solution
General
Smiths Age 51
Smiths Retirment Age 65
Smiths Assumed Age of Death 92
Years in Pre-Retirement Period 14
Years in Post-Retirement Period 27
Economic
Inflation 4.0%
After-Tax Investment Return 5.0%
Real Return 1.0%
Smiths Income and Expenses
Annual Savings 15,000
Living Expenses in Retirement 90,000
Retirement Income 40,000
Retirement Period 70-91
Living Expenses in Retirement, Today’s Dollars 90,000
Retirement Income, Today’s Dollars 40,000
5)
a) Magdalena’s accumulated savings at retirement is 2,555,108
b) Her annual income in retirement is expected to be 51,704.
Her cost of living in retirement is expected to be 242,057.
Her annual withdrawal for the first year of retirement is 108,916.
c) Based on the preceding figures the withdrawal rate is 4.28%
d) In order for Magdalena to meet the 4% withdrawal target rate she would need
to adjust her spending habits and reduce annual withdrawals by $6700. These
spending cuts could be discussed in further detail with her financial advisor.
Age 35
Retirement Age 67
Years Before Retirement 32
Accumulated Savings $72,000.00
Annual Savings $23,000.00
Inflation 3.0%
Retirement COL Decline $6,000.00
Investment Return 6.0%
Current COL $100,000.00
COL in Retirement in today‘s dollars $94,000.00
Social Security Benefit $31,704.00
Pension $20,000.00
Financial Assets at Retirement $2,555,108.74
Inputs
Solution
Step 1: Calculate the Amount of Financial Assets at Retirement
Step 2: Determine the Annual Cost of Living Beginning in Retirement
Step 3: Ascertain the Amount of Annual Income Available for Retirement
Step 4: Develop the Initial Annual Withdrawal Needed
Step 5: Compute the Annual Withdrawal Rate
Step 6: Review and Reconsider Key Figures
Answers to CFP® Questions
Question
Answer
Author’s Explanation
Question 17.1
C
Question 17.2
A
Question 17.3
A
ERRATA TO CFP® CERTIFICATION EXAMINATION QUESTIONS AND
PROBLEMS
17.2
The first paragraph in the problem was left out:
SOLUTIONS TO SELECTED CFP® CERTIFICATION EXAMINATION
PROBLEMS1
17.1
A client is concerned about the impact that inflation will have on her retirement income.
The client currently earns $40,000 per year. Assuming that inflation averages 5.5 percent
for the first five years, 4 percent for the next five years and 3.5 percent for the remaining
time until retirement, what amount must her first-year retirement income be when she
retires 13 years from now if she wants it to equal the purchasing power of her current
earnings?
a. $62,550
b. $68,841
c. $70,520
d. $80,231
e. $83,157
Solution:
Inputs 5 5.5 -40,000
1 The solutions supplied are those of the author and not of the CFP Board.
Solution 63,604.67
17.2
Billy’s objective is to retire at age 65 with $2,000 in monthly retirement income,
exclusive of Social Security benefits. He assumes a life expectancy of age 95. The union
retirement plan will provide him with $1,000 monthly. (There are no matching
contributions from Billy’s employer to the plan, and his income is adequate to have the
required level of contributions fall within the deferral limits of the plan. Contributions
and payments, as appropriate, are made at the beginning of each month.)
If the return in the company’s plan is 10 percent, what monthly amount will Billy have to
contribute to that plan for 10 years to meet his objective?
a. $556
b. $566
c. $576
d. $747
e. $1,113
Solution:
Note: The following paragraph that should come first in the problem was left out:
In addition to the monthly income of $1,000 from the union retirement plan Billy would
Amount Explanation
Set the calculator to BEGIN mode since payments are made at the beginning of each
month.
The monthly amount of required savings would be:
Amount Explanation
Number of Compounding Periods 120 10years x 12 months
Set the calculator to BEGIN mode since contributions are made at the beginning of each
month.
17.3
A couple wants to accumulate a retirement fund of $300,000 in current dollars in 18
years. They expect inflation to be 4 percent per year during that period. If they set aside
$20,000 at the end of each year and earn 6 percent on their investment, will they reach
their goal?
a. Yes, they will accumulate $10,368 more than needed.
b. Yes, they will accumulate $47,454 more than needed.
c. No, they will accumulate $10,368 less than needed.
d. No, they will accumulate $47,454 less than needed.
Solution:
Inflation Adjusted Retirement Funds in 18 Years = $300,000 x (1 + 0.04)18
Lump Sum of Savings in 18 Years