W13_RW_Calculate Retirement Plan and Investment


Problem Identification

My friend (35 Year) this year earned $5,000/ month, joint the company retirement program, it is automatic deduction from monthly salary by 14% to be invested in selected mutual fund with earning 10% per year. The average salary merit increase per year is 8%.  He plan early retire to start his own business at the age of 45 (10Year from now) with the minimum capital $200,000.

Problem Statement:

If the accumulated money at age of 45 is not enough, so what age he should plan to early retire with the consequence the business capital will increase in line with the inflation rate 6%?

Feasible Alternative:

  1. If at age of 45 the accumulated money is enough then he will resign and start his own business.
  2. If at age of 45 the accumulated money then he should extent to work until certain age to start his own business.

Tools and Technique:

I’m using the formula stated in Sullivan, Engineering Economy pp.144-149. To calculate Geometric Sequence of Cash Flow.

  • Current Salary per month = $5,000 – OR- $60,000 per year
  • Investment: $60,000 x 14% = $8,400 per year.
  • P=(A[1-(P/F,i%,N)(F/P,f%,N) )/ i-f
  • P=($60,000[1-(P/F,10%,10)(F/P,8%,10) ]) /10%-8%
  • P=($60,000[1-(0.3855)(2.1589)])/2%
  • P=$70,452.5
  • F=P(F/P,10%,10)
  • F=$70,452.5 (2.5937)
  • F=$182,732.65 à the accumulated money at 10th years.

Because of the accumulated money is not enough to start his own business, then he should extent the work.

With the same step above now we have to find the P for F=$200,000

  • F=P(F/P,10%,10)
  • $200,000=$70,452.5(F/P,10%,N)
  • (F/P,10%,N) = $200,000/$70,452.5
  • (F/P,10%,N) = 2.8388
  • Now see the interest table provided in Sullivan, Engineering Economy 5th Edition, Appendix C.
  • For N = 11 Year à2.8531 and for N=13 Year à3.1384
  • So the N would be 11 Year.
  • Now test the whole calculation with N=11
  • P=(A[1-(P/F,i%,N)(F/P,f%,N) )/ i-f
  • P=($60,000[1-(P/F,10%,11)(F/P,8%,11) ]) /10%-8%
  • P=($60,000[1-(0.3505)(2.8531)])/2%
  • P=$76,765.16
  • F=P(F/P,10%,11)
  • F=$76,765.16 (2.8531)
  • F=$219,018.69 à the accumulated money at 11th years

IF the capital investment is postponed for 1 year with 6% inflation it became:

  • F=$200,000(F/P,6%,1)
  • F=$200,000(1.0600)
  • F=$212,000

So the accumulated money at 11th Years = $219,018.69 > 11th year Capital Investment=#212,000

It is recommended he retire at age 46.

 

Post Evaluation of Result

Based on the calculation above my friend is recommended to take early retirement at age of 46 to start his own business.

Reference:

Sullivan, W.G., Wicks, E. M., & Koelling, C. P. (2011). Engineering Economy 5th Edition, Chapter 5 P.144-200

The Smartest Way to Invest for Retirement (http://www.fool.com/investing/mutual-funds/2007/04/26/the-smartest-way-to-invest-for-retirement.aspx)

Advertisements

1 thought on “W13_RW_Calculate Retirement Plan and Investment

  1. AWESOME, Pak Ridwan!!!! NOW you are starting to understand what I am looking for. And I PROMISE you, this assignment is ESSENTIAL for you to master if you want to pass your EVP, CEP and PSP exams. Part 2 of each of those exams will require you to write an assessment and the best way to start is by following this 7 step outline or framework!!

    OK, now that you understand it better, I’d like to see you catch up, but I strongly suggest that you seek out help from Eli or Pak Rifai, or Hari and have them review your posting BEFORE you submit it. It really pains me to have to reject any of your postings, so to minimize that risk, ask Eli or Rifai or Hari or anyone else who is consistently getting 4-5 stars…..

    Again, CONGRATULATIONS on this success and looking forward to seeing many more in the coming weeks.

    BR,
    Dr. PDG, Jakarta

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s