The Work/Accumulation period
• The retirement spreadsheet should calculate on a year by year basis the accumulation of retirement savings. This means you will have a series of time value of money calculations. Each year will therefore be a future value calculation for the year. You must state for each year the proportion of your portfolio you want to invest in equities (with an expected return of xx%) vs. bonds (with an expected return of aa%)
• Assume annual contributions are split into equal monthly installments made at the end of each month, coincident with the receipt of your paycheck.
• For simplicity, assume your account compounds on a monthly basis.
• Repeat the calculation for each year you are working to determine your account balance at retirement.
2. The Retirement/Spending Period
• In your first year of retirement, there will be no further cash inflows into the retirement account. Since you are no longer working, you are only drawing from the principal you have accumulated and not earning a salary. Your job is to calculate how much money will be left in your account at the end of the year after drawing out your retirement income. Remember, your principal will still earn the risk-free rate of return of ww%. You aren’t pulling out all the money at once. The annual draw on your savings will (a) be split into equal monthly withdrawals, (b) should be based on your budget and (c) be reported in the “withdrawal” column.
• Continue the calculation for future years. Increase your withdrawal each year by 2.1% so your retirement income keeps pace with inflation. Remember, your principal will still be earning the risk-free rate of interest.
• Report how old you are when (or if) you run out of money. Were your savings sufficient to fund your retirement until your expected date of death? Based on this analysis, would you change anything about either your pre-retirement contributions or your post-retirement withdrawal patterns? Would you change your asset mix?
• Make appropriate changes to your assumptions to ensure that your retirement income lasts to age 100. Once you have a retirement plan that you are comfortable with, we will use that for the third part of the assignment.
** see the instrictions and make the edition on the XL file
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