Word Document Of 7,001,000 Words With Attached Excel Spreads

Word Document Of 7001000 Words With Attached Excel Spreadsheet Showi

Word document of 700–1,000 words with attached Excel Spreadsheet showing calculations. Your next assignment as a financial management intern is to apply the knowledge that you acquired while engaging in the time value of money discussion that you had with your colleagues. In this task, you will be building the foundation for a retirement plan using the concepts presented in this phase. · First, you will need to estimate the future cost of 3 lifestyles assuming an inflation rate of 3% and the number of years before you turn 67 years old. o Comfortable lifestyle current cost is approximately $100,000/year. PV of Life Style (Given) Average Rate of Inflation (RATE) Years to Retirement (NPER) Find FV of Life Style $100,000 3.0% · Next, you will need to estimate the 5-year average rate of return of the stock market (you should use the top 500 stocks, which can be researched at finance Web sites). o At this rate of return, how long would it take for an investment to double? Top 500 Stocks Value 5 yrs. ago (PV) Top 500 Stocks Value Now (FV) Number of Periods (NPER) 5-Year Return on Top 500 Stocks (RATE) 5 · If an individual needed the following amounts to retire, how much would he or she have to invest today at the rate of return that you calculated in the previous step, assuming he or she will turn 67 in the same year you do? o $3,000,000 FV of Account (Given) 5-Year Return on Top 500 Stocks (RATE) Years to Retirement (NPER) Find PV of Investment $ 3,000,000 · Now, you will need to estimate the life expectancy of the retiree. o Use 90 years of age as an estimate. · Now, you can subtract the life expectancy of the retiree from 67 (the retirement age) and use the first of the 2 tables below to calculate the required amount at retirement to support the following lifestyles adjusted for inflation (hint: the inflation adjusted amounts will be the payment as you will be calculating the present value of this annuity using a rate of return of 12%) · Now, using the second table, you can calculate the annual contribution that needs to be made to have each required amount at retirement. o To determine the annual contribution, use the amount that you calculated above as the future value, the market rate of return from section 2 as interest rate, and number of periods as 67 minus your current age. FV of Life Style (PMT) Given Expected Rate of Return (RATE) Years in Retirement (NPER) Required Value at Retirement (Find PV of Annuity) 12.0% 23 FV of Account (Use PV of Annuity from above) 5-Year Return on Top 500 Stocks (Rate) Years to Retirement (NPER) Annual Contribution Required to meet goal (Find PMT) · After completing the required calculations, explain your results in a Word Document and attach the spreadsheet showing your work. Be sure to explain the following: o The difference between present and future values o How the present value and future value calculations are calculated and related o The difference between compounding and discounting Note: You can find information about the top 500 stocks at this Web site . Reference S&P 500 index chart . (2014). Retrieved from the Yahoo! Finance Web site: Be sure to document your paper with in-text citations, credible sources, and list of references used in proper APA format.

Paper For Above instruction

The process of planning for retirement involves several key financial concepts, particularly the calculation of present and future values, which are foundational in estimating how much savings are needed for a comfortable retirement. This paper discusses the methodologies and calculations necessary for building a retirement plan, focusing on estimates of future costs, investment returns, and necessary contributions, complemented by explanations of core financial principles such as compounding and discounting.

Estimating Future Lifestyle Costs

To prepare for retirement, it is essential to project the future costs associated with maintaining various lifestyles. Using the current annual cost of $100,000 for a comfortable lifestyle and assuming an inflation rate of 3%, the future value (FV) of this lifestyle’s cost can be calculated. The formula used is FV = PV * (1 + inflation rate)^years to retirement. If the individual is 67 years old, and the current age is, for example, 30, then the number of years to retirement is 37. Applying this formula, the FV of the lifestyle cost at retirement is approximately $189,861. This same approach can be used to project costs for other lifestyles with different current expenses, facilitating tailored retirement planning.

Assessing Stock Market Returns and Doubling Periods

Estimating stock market returns involves analyzing historical data, such as the S&P 500 index. By researching the value of the top 500 stocks five years ago and their current value, the five-year average rate of return can be calculated using the compound annual growth rate (CAGR) formula: CAGR = (FV/PV)^(1/n) - 1. For instance, if the value five years ago was $1,000 and now is $1,500, the CAGR would be approximately 8.45%. To determine how long it takes for an investment to double at this rate, the rule of 72 is used, where prediction time is approximately 72 divided by the annual rate of return, indicating roughly 8.5 years for doubling at an 8.45% return.

Calculating Present Value of Retirement Needs

If an individual requires $3 million at retirement, the present value (PV) needed today can be calculated using the formula PV = FV / (1 + r)^n, where r is the rate of return and n is the number of years until retirement. Assuming a rate of return as estimated previously (e.g., 8.45%), and 37 years until retirement, the PV can be computed to determine the current investment needed. This calculation underscores how future financial goals are tied to current savings through discounting.

Estimating Retirement Duration and Income Needs

Estimating life expectancy affects the planning horizon. Assuming a life expectancy of 90 years when retiring at 67 implies a retirement period of approximately 23 years. To determine the amount needed at retirement to support an inflation-adjusted lifestyle, the present value of an annuity formula is used: PV = PMT * [(1 - (1 + r)^-n) / r], where PMT is the annual withdrawal, r is the rate of return during retirement (12%), and n is the years in retirement. This calculation provides the lump sum necessary at retirement to sustain the desired lifestyle.

Calculating Required Contributions

To accumulate the necessary retirement fund, annual contributions must be calculated. Using the future value of an ordinary annuity formula, and the known PV at retirement, the periodic payments can be computed: PMT = FV * [r / ((1 + r)^n - 1)]. These contributions are made annually from the current age until retirement, with the assumed rate of return applied, highlighting the importance of disciplined savings.

Differences Between Present and Future Values

Present value is the current worth of a future sum of money, discounted at an appropriate rate, reflecting how much a future sum is worth today. Future value, conversely, is what a present amount will grow to over time when invested at a given rate, considering compounding. Both concepts are interconnected: FV can be calculated from PV by applying the compounding formula, while PV is determined by discounting the FV.

Compounding and Discounting: Core Financial Principles

Compounding involves earning interest on both the initial principal and accumulated interest, leading to exponential growth of investments over time. Discounting, on the other hand, involves calculating the present worth of future cash flows by reversing the effects of compounding, essential in valuing future retirement needs and investments. Both principles reflect the time value of money, emphasizing how the value of money changes over time depending on the growth or discount rate.

In conclusion, effective retirement planning relies on understanding and applying the concepts of present and future values, compounded growth, and discounting. Through meticulous calculations and projections, individuals can determine the savings required today to meet future financial goals. The integration of historical market data and realistic assumptions about inflation and lifespan enhances the accuracy of these projections, ultimately guiding sound financial decision-making.

References

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  • S&P Dow Jones Indices. (2014). S&P 500 index chart. Yahoo! Finance. https://finance.yahoo.com
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