Question

They are reviewing their financial situation to ensure they will be ready for retirement. They anticipate being able to live comfortably with 80% of their current expenses. The rate of return on their investments until they retire is 3% (and the rate of inflation is the same). They expect this percentage to drop to 2% after retirement. What is their expected post-retirement income as a percentage of their current expenses?

a) 60%
b) 70%
c) 80%
d) 90%

Answer 1

The student's expected post-retirement income as a percentage of their current expenses would be 80%, as they anticipate living on 80% of their current expenses with an investment return that matches the rate of inflation before retirement and only slightly less after retirement.

Step-by-step explanation:

Calculating the expected post-retirement income as a percentage of current expenses takes into account the anticipated rate of return on investments and the rate of inflation. If the student plans to live on 80% of their current expenses and the rate of return is 3% (matching the inflation rate) before retirement, and it drops to 2% post-retirement, they would effectively maintain the value of their savings.

Financial advisors often suggest aiming to replace approximately 70% of your pre-retirement income. However, living on 80% of current expenses already suggests you would be saving 20% of the pre-retirement income, which is above the standard recommendation of economics experts who advise saving around 15% of your income for retirement.

Given the information, since the rate of return matches the inflation rate before retirement, the value of savings is maintained. After retirement, even with a lower rate of return of 2%, the gap isn't significant enough to reduce the planned 80% expense goal, especially if the individual has been saving appropriately. Thus, the expected post-retirement income as a percentage of current expenses would be option (c) 80%.