Final answer:
The Patels need to calculate the balance required for retirement considering a 7% return pre-retirement, 5% post-retirement, and 3% inflation, minus Social Security benefits. Accurate calculation requires knowledge of their annual expenses, but financial advisers typically recommend having around 70% of pre-retirement income. Thus, a starting estimate could be between $1,000,000 and $2,000,000. Option 2 is correct answer.
Step-by-step explanation:
The Patels are attempting to ascertain the balance needed on the first day of retirement to meet their goals, accounting for their Social Security benefits and anticipated investment returns. To approach this calculation, one must understand the basics of compound interest and how it affects retirement planning. Given that the Patels desire to retire at age 65, the key factors are a 7% investment return before retirement, a 5% return after retirement, and an average inflation rate of 3%.
An accurate calculation would involve determining their annual expenses during retirement, subtracting Social Security benefits, and then adjusting the remainder for inflation. This amount would then be used to calculate the necessary principal balance required to sustain these withdrawals, considering the given returns on their investments.
Without specifics on their expenses or Social Security benefits, a precise balance cannot be calculated in this context. However, utilizing a retirement calculator could provide a more personalized estimate.
Generally, most financial advisers suggest that retirees will need approximately 70% of their pre-retirement income to live comfortably. The provided information in the example showcases the power of compound interest, which underscores the importance of saving early, but does not directly solve for the Patels’ required balance. An informed estimate for a comfortable retirement could start at $1,000,000, going up to $2,000,000 or more, depending on their expected lifestyle and expenses in retirement.