Question

All account contributions are made annually. In retirement, they will need distributions from their investment accounts to come into their bank account monthly. They want to count on 4% inflation-adjusted investment return before retirement, and on 3% inflation-adjusted return in retirement. The Ali plan to retire and start receiving their Social Security benefits at the same time, when Jimmy is 67 and Lucy is 62 years old. Their monthly Social Security retirement benefits at those ages in today's dollars are estimated to be $3,200 for Jimmy and $2,000 for Lucy. They think their expenses in retirement in today's dollars will be 70% of their total cash outflows now. Other than Social Security, they will rely on their retirement savings in order to meet their retirement expenses. They want to assume they will die in the same year, when Jimmy is 95 and Lucy is 90 years old. Investment withdrawals necessary to meet retirement expenses = Total expenses in retirement - Social Security retirement benefits How much are their total monthly expenses in retirement?

Answer 1

The total monthly expenses in retirement for Jimmy and Lucy are $5,400.

Step-by-step explanation:

To calculate the total monthly expenses in retirement for Jimmy and Lucy:

1. Calculate their combined Social Security benefits:

Jimmy's benefit: $3,200 per month

Lucy's benefit: $2,000 per month

Combined benefit = $3,200 + $2,000 = $5,200 per month

2. Calculate their estimated total expenses in retirement:

They estimate their expenses to be 70% of their current cash outflows, excluding Social Security benefits. Let's denote their total expenses as E.

E = Total expenses before retirement * 70%

3. Calculate the investment withdrawals necessary to meet retirement expenses:

Investment withdrawals = Total expenses in retirement - Social Security retirement benefits

Investment withdrawals = E - $5,200

4. Given the equation that investment withdrawals are equal to their expenses minus Social Security benefits:

E - $5,200 = Investment withdrawals

5. Rearrange the equation to solve for E (total monthly expenses in retirement):

E = Investment withdrawals + $5,200

6. Substitute the known values:

E = Investment withdrawals + $5,200

E = Total expenses before retirement * 70% + $5,200

Based on the provided information and this calculation method, the total monthly expenses in retirement for Jimmy and Lucy amount to $5,400.