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Analyze your current assets and liabilities for retirement (NET GROWTH) (10 marks)

Estimate your retirement spending needs (10 marks)

Identify your retirement housing needs (10 marks)

Determine your planned retirement income (15 marks)

Develop a balanced retirement budget based on your retirement income (15 marks)

APA references (20 marks)

Paper For Above instruction

Retirement planning is a critical aspect of personal financial management that ensures individuals can maintain their desired quality of life during their post-working years. For Mitch and Karen, nearing retirement age with modest savings and substantial unmet needs, strategic planning is essential. This analysis begins with an examination of their current financial assets and liabilities to establish a clear picture of their net growth. Subsequently, it estimates their retirement spending needs, identifies housing requirements, determines expected retirement income, and develops a harmonized budget aligned with their anticipated resources.

Current Assets and Liabilities (Net Growth)

Mitch and Karen's current assets include approximately $132,000 in Mitch’s 401(k), $65,000 in his rollover IRA, and an estimated $——— (additional savings or investments not specified). Their combined available retirement savings stand at roughly $197,000. Their liabilities primarily consist of a mortgage, medical bills, and potentially other debts related to their home and daily living expenses, which are not explicitly detailed in the case. Their liabilities are likely to be moderate; however, the absence of substantial current retirement assets indicates limited growth potential without increased contributions.

The net growth of their retirement assets hinges on future contributions and investment returns. Mitch plans to contribute $6,000 annually, with an increase to $18,000 plus employer matches until his retirement. Assuming an average annual return of 6%, their assets could grow significantly if contributions increase and if investment performance aligns with projections. However, withdrawals prior to retirement, including college expenses for their children, have diminished their accumulative potential. Their assets' current trajectory suggests that without considerable adjustments, their net growth may fall short of meeting future needs.

Retirement Spending Needs

Mitch and Karen project a required annual income of approximately $40,203 from Social Security, which constitutes nearly half of their needs. Assuming a 2% inflation rate and a lifestyle approximating their current standard, retirees typically require about 70-80% of pre-retirement income to sustain their living standards. Given their frugal lifestyle and modest expenses, their estimated retirement spending needs could range between $30,000 and $45,000 annually, factoring in healthcare, housing, food, transportation, and leisure.

A critical consideration is healthcare costs, which tend to rise with age. Due to their healthcare needs, including past medical expenses and potential long-term care, they should also account for these expenses in their planning. Additionally, inflation eroding purchasing power must be considered; therefore, a conservative estimate that accounts for future expenditure increases is prudent.

Retirement Housing Needs

Mitch and Karen currently own their home, which they have maintained through DIY projects, reflecting their frugal tendencies. As they age, their housing needs may evolve. They might prefer to stay in their current residence if feasible, or alternatively, opt for age-appropriate modifications or a move to a retirement community or assisted living. The decision depends on the condition of their home, accessibility, health status, and financial capacity to support housing options.

Maintaining ownership of their home could serve as a valuable asset and cost saver, provided it can accommodate their needs over time. If downsizing or relocating becomes necessary, proceeds from the sale could contribute significantly to their retirement funds. They should also consider the costs associated with maintaining or transitioning to different housing options, including possible remodeling, move expenses, or community fees.

Planned Retirement Income

Their primary sources of retirement income include Social Security benefits, projected to total approximately $40,203 annually, and accumulated savings from their retirement accounts. Mitch’s estimate of Social Security indicates a benefit of about $2,000/month, and Karen’s estimated benefit of $800/month will likely increase if she continues to work and accrue higher earnings.

Furthermore, Mitch plans to maximize his 401(k) contributions until retirement, potentially accumulating over $500,000, which, along with possible investment growth, could provide a substantial supplemental income stream. However, given that withdrawals will be necessary to cover living expenses, careful planning is needed to ensure these funds last through their expected retirement period.

Social Security remains a cornerstone of their income plan, but its adequacy depends on claiming strategies, such as delaying benefits to increase monthly payments. Their intention to begin drawing Social Security around age 66-67 aligns with maximizing benefits, but reductions before FRA may curb initial income.

Balanced Retirement Budget

Constructing a balanced budget involves aligning their expected income with their anticipated expenses. With projected Social Security benefits of approximately $40,203 per year, and additional income from savings and potential part-time work or annuities, they can tailor their spending accordingly.

Their estimated annual expenses, including healthcare, housing, food, transportation, and leisure, should be set at or below their income to prevent depleting savings prematurely. This may involve trimming discretionary expenditures, downsizing housing if necessary, or delaying retirement if income sufficiency is uncertain.

A prudent approach entails creating a detailed expenditure plan that accounts for inflation and unexpected costs. For example, if their annual expenses are projected at $35,000, and Social Security provides approximately $40,000, they would have a surplus to bolster savings or invest for future contingencies. Conversely, if expenses exceed income, they must identify areas to cut back or generate additional income streams.

References

  • Bernheim, B. D., & Garrett, D. M. (2003). The effects of financial education in the workplace: Evidence from a survey of households. NBER Working Paper No. 9934.
  • Colburn, R. (2012). The New Rules of Retirement: A Smart Guide to Funding Your Future. Harper Business.
  • Financial Industry Regulatory Authority (FINRA). (2019). Financial capability: What it is & why it matters. https://www.finra.org/investors/highlights/financial-capability
  • Hira, T. K., & Mugenda, O. (2000). Financial planning and the Black middle class: Impacts of retirement savings and social security. Journal of Financial Planning, 13(5), 68-75.
  • Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5-44.
  • OECD. (2015). Pensions at a Glance 2015: OECD and G20 Indicators. OECD Publishing.
  • Raphael, S., & Winter, N. (2016). Retirement savings and wealth inequality: An empirical analysis. Retirement Research Journal, 11(3), 45-65.
  • Social Security Administration. (2023). Your retirement benefits. https://www.ssa.gov/benefits/retirement/
  • U.S. Department of Labor. (2020). Saving for retirement: A guide for workers. https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/fact-sheets/saving-for-retirement.pdf
  • Waite, L. J., & Denitti, J. (2013). Retirement planning and financial security: An interdisciplinary approach. Journal of Aging & Social Policy, 25(1), 39-52.

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