Spreadsheet Models Case Problem: Tim's Retirement Planning

Spreadsheet Models Case Problem: Tim’s Retirement Planning

Take as the base case for Tim’s retirement planning problem the parameter settings below: While there are many ways to model this problem, any sound approach will have the following characteristics: There spreadsheet model will have a parameters section and a model section. There will be essentially two modules for calculating the age when funds run out and the balance at the beginning of retirement.

These are a pre-retirement module and a post-retirement module. During the pre-retirement time, money is accumulated through salary-based contributions from Tim, additional pre-tax contributions from Tim, the school’s contribution to Tim’s account and returns on the investment. During the post-retirement time, spending is taken out of the account, taxes must be paid on the amount withdrawn, and returns on investment accrue into the account. We have made a number of assumptions including the following: All input parameters will be constant over time. All contributed funds come in at the end of the year, so that those funds do not earn a return during that year.

After retirement, a return is made on the beginning balance for that year and all expenses are deducted at the end of the year. Below we show each portions of each individual module. Note that we inflate the salary by the appropriate amount each year (column C) and we include the return on investment along with the other cash flows into the fund (Column H). Note that spending is inflated in (Column L). We use the INDEX function in cell N27 to find the beginning balance based on the year of retirement.

We use an IF statement to determine if funds are still available or not. In cell Q27, we use an INDEX function with the MATCH function to find the first occurrence of a one in column P and return the age of Tim when this occurs. There are many factors at work here and student responses may vary. However the impact of retirement age and additional pre-tax contributions is specifically requested. A Data table as shown below indicates how age when funds run out varies with these inputs.

Graphically, using just the even ages we have: Obviously as retirement age and pre-tax contributions increase, so too will the age when funds run out. For a given age, contributing the maximum pre-tax additional contributions will earn Tim an additional 4 to 6 years. Delaying retirement by 5 years (from 65 to 70) will earn Tim an additional two to three years. While retirement age and pre-tax additional contributions are choices Tim can make, many other factors will have an impact on his retirement account. For example, the rate of inflation and the return on the pre-retirement funds are variables that Tim cannot directly control.

The following table and chart below shows the impact of these factors on the age when funds run out. As the chart shows, even moderate inflation can have a major impact on how long the fund lasts after retirement. Contributing more or strong returns can help mitigate the impact of inflation. Age When Funds Run Out Additional Pre-tax Contributions Age When Funds Run Out Age When Funds Run Out 0 0 0.01 0.02 0.03 0.04 0.05 0.06 7.E-2 0.08 0.09 0..01 0 0.01 0.02 0.03 0.0 4 0.05 0.06 7.E-2 0.08 0.09 0..02 0 0.01 0.02 0.03 0.04 0.05 0.06 7.E-2 0.08 0.0 9 0..03 0 0.01 0.02 0.03 0.04 0.05 0.06 7.E-2 0.08 0.09 0..04 0 0.01 0.02 0.03 0.04 0.05 0.06 7.E-2 0.08 0.09 0..05 0 0.01 0.02 0.03 0.04 0.05 0.06 7.E-2 0.08 0.09 0. Inflation Age whenFunds Run Out

Paper For Above instruction

Introduction

Retirement planning is a complex and vital aspect of financial management, requiring careful modeling of various factors to ensure sufficient funds during one's retirement years. The case of Tim exemplifies this process, incorporating multiple variables such as contributions, investment returns, inflation, and retirement age. This paper demonstrates how a spreadsheet model accounting for these parameters can help predict the age at which funds will be depleted, supporting informed decision-making for retirement planning.

Developing the Retirement Model

The foundational step in building Tim's retirement plan involves establishing a parameters section, where all relevant constants like annual salary, contribution rates, investment return rates, inflation rate, and retirement age are defined. The model is divided into two modules: pre-retirement and post-retirement. The pre-retirement module accumulates funds based on contributions and investment returns, whereas the post-retirement module models withdrawals, taxes, and investment growth.

Pre-Retirement Module

In the pre-retirement phase, Tim's salary inflates annually based on a fixed rate, with contributions originating from his salary, additional pre-tax contributions, and the school's contributions. The contributions are assumed to be made at the end of each year, and returns on investments accrue throughout this period. The model uses Excel functions such as the INDEX to reference the beginning balance at each year's end, accounting for the previous year's returns and contributions.

Post-Retirement Module

At retirement, the model shifts focus, with annual withdrawals to cover spending, taxes on those withdrawals, and investment returns on the remaining balance. The expenses are inflation-adjusted, and the returns are compounded on the beginning balance each year. A critical component is the determination of the year when the fund is exhausted; this is identified through an IF statement that checks whether the available balance can sustain further withdrawals.

Impacts of Retirement Age and Contributions

The model highlights that increasing the retirement age and pre-tax contributions extends the duration of the fund. For example, contributing the maximum pre-tax amount can extend the fund’s life by 4-6 years for the same retirement age. Similarly, delaying retirement from 65 to 70 can add approximately 2-3 years before depletion, illustrating the significant leverage these factors provide.

Influence of Inflation and Investment Returns

Variable inflation rates considerably affect the longevity of retirement funds. Moderate inflation can substantially erode fund duration, but higher investment returns and increased contributions can mitigate this impact. This dynamic emphasizes the importance of optimizing contributions and investment strategies in retirement planning.

Simulation and Data Analysis

Using a data table, the model evaluates how different assumptions influence the age when funds run out. Graphs visually demonstrate the relationship: higher contributions and delayed retirement extend the lifespan of the investment, while higher inflation shortens it. The sensitivity analysis underscores the necessity for flexible planning and risk management to navigate these variables.

Conclusion

Accurate modeling of retirement funds through spreadsheet tools is essential for strategic financial planning. The analysis of Tim's scenario reveals that adjusting retirement age and contribution levels can significantly impact the financial security during retirement. Furthermore, recognizing the influence of external factors like inflation and market returns enables better preparation for unforeseen economic changes. Ultimately, a robust and adaptable model ensures that retirees can maintain their desired standards of living throughout their retirement years.

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