How Much Of Your Money Will You Have In Retirement
How much of YOUR money will you have in your retirement at age 60
In this analysis, we examine two retirement plans for an individual who is currently 30 years old, married, with a contractual employment arrangement earning $150,000 annually for 30 years. The individual has promised to work only until age 60, and at that point, must choose between two retirement options: (1) a pension benefit calculated at 2.5% of the salary for each year worked, and (2) an investment-growth plan where contributions are matched and invested at an assumed annual interest rate of 6%. The individual's contribution to the retirement fund is 6.5% of the annual salary. We will determine how much personal contribution money will accumulate by age 60, evaluate the total value of the retirement benefits under each plan, and project the annual retirement income if the individual plans to live for 25 years post-retirement.
Calculating total personal contributions to retirement by age 60
The individual contributes 6.5% of $150,000 annually over 30 years. The annual contribution can be calculated as:
Annual Contribution = 0.065 * 150,000 = $9,750
Since contributions are made each year for 30 years, the total personal contribution without interest is:
Total Contributions = 9,750 * 30 = $292,500
However, due to interest accumulation (especially under the investment plan), the total amount will differ at age 60; this will be calculated separately.
Plan 1: Fixed pension benefit at retirement
This plan offers a benefit equal to 2.5% of the salary for each year of employment:
Benefit per Year = 2.5% 150,000 30 = 0.025 150,000 30 = 0.025 * 4,500,000 = $112,500
This amount is typically paid annually for the remaining life expectancy of 25 years, starting at age 60.
The present value at retirement of the total pension is determined by the annual payment and the assumed lifespan, but for simplicity, we are focused on the annual benefit amount: $112,500 per year.
Plan 2: Investment growth of contributions at 6% interest
This plan involves matching contributions (100% match) made each year, invested at an annual interest rate of 6%. The contributions are made at the end of each year, for 30 years, and will grow until age 60.
Because of compounding, the future value (FV) of a series of equal contributions (an ordinary annuity) can be calculated using the formula:
FV = P * [((1 + r)^n - 1) / r]
Where:
- P = annual contribution = $9,750
- r = annual interest rate = 6% = 0.06
- n = number of years = 30
Calculating FV:
FV = 9,750 * [((1 + 0.06)^30 - 1) / 0.06]
First, compute (1 + 0.06)^30:
(1.06)^30 ≈ 5.74349
Subtract 1:
5.74349 - 1 = 4.74349
Then, divide by r = 0.06:
4.74349 / 0.06 ≈ 79.058
Now, multiply by P = 9,750:
FV ≈ 9,750 * 79.058 ≈ $770,136.05
Thus, the total accumulated value in the retirement account at age 60 will be approximately $770,136.05.
Comparison of Retirement Benefits
Plan 1: Fixed Pension
The individual receives an annual pension of $112,500 for 25 years, totaling:
Total pension payout over 25 years = 112,500 * 25 = $2,812,500
This amount is guaranteed and provided annually, assuming no inflation adjustments here for simplicity.
Plan 2: Investment Growth
The accumulated amount at retirement is approximately $770,136.05. To determine how much this would provide annually over 25 years, we calculate the annuity payout:
Annual Retirement Income = FV / 25 = 770,136.05 / 25 ≈ $30,805.44
This is a simplification assuming the entire amount is converted into a fixed annual payout, which could also be managed as an annuity with interest earning, but as per the question, this straightforward division gives an estimate.
Which plan is better?
Assessing the two options, the fixed pension offers a steady income of $112,500 annually, totaling $2,812,500, while the investment plan yields approximately $30,805 annually, totaling roughly $770,136.05 if entirely liquidated evenly over 25 years. The pension plan provides significantly higher income and greater financial security, assuming the pension payout is maintained, and the individual prefers consistent income. The investment plan, however, offers flexibility and potential for higher returns if managed well but involves investment risk and less predictable income.
From a purely numerical perspective, the pension plan provides a more substantial and reliable income stream over retirement years, making it the better choice financially under the assumptions stated.
Summary
Overall, the individual would have contributed about $292,500 of personal money over 30 years. The pension plan provides a guaranteed annual benefit of $112,500, while the investment plan, with contributions matched and invested at 6%, would accrue around $770,136.05 in total value, translating roughly into $30,805 annually over 25 years. Based on these calculations, the pension plan offers significantly more security and higher annual income during retirement, favoring its selection unless the individual prefers investment flexibility and higher risk tolerances.
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