Question

Mr. Lee, aged 40, single, has steady job and income. Currently, Mr. Lee’s living expenses is $200,000 per year. He plans to retire at age 65 and wants his financial planner to establish an appropriate retirement plan for him. After reasonable analysis, he feels that he can reduce the expenditure to 70% of the current level at his retirement. His life expectancy after retirement is 20 years. Including the portion from his employer, his monthly MPF contribution is $2,000. (Assume the expected average inflation rate in the future will be 7% per year and the current average return on investment is 13%.) Mr. Lee understands that the investment after retirement should be more conservative so he expects the investment target after retirement will be those assets with lower risk and return. Accordingly, the return at that time will reach 9% per year. Based on the above data, calculate the retirement fund required in order to maintain the 70% of Mr. Lee’s current living standard level and how much addition saving is required per month?

Answer 1

Retirement Fund required= $613,240

Additional saving required per month = $83,008

Step-by-step explanation:

To calculate the retirement fund required to maintain 70% of Mr. Lee's current living standard level, we need to consider his living expenses, inflation rate, expected return on investment, and life expectancy.

1. Determining future living expenses:

Mr. Lee's current living expenses are $200,000 per year. He plans to reduce it to 70% of the current level at retirement. So, his future annual living expenses will be 70% of $200,000, which is $140,000.

2. Estimating the retirement fund required:

To estimate the retirement fund required, we need to calculate the future value of annual living expenses for 20 years, adjusted for inflation.

Using the future value formula: FV = PV * (1 + r)^n, where FV is the future value, PV is the present value, r is the annual inflation rate, and n is the number of years.

FV = $140,000 * (1 + 0.07)^20

FV = $140,000 * 4.366

FV = $613,240 (rounded)

So, Mr. Lee will need a retirement fund of approximately $613,240 to maintain 70% of his current living standard level for 20 years after retirement.

3. Calculating the additional monthly savings required:

To calculate the additional monthly savings required, we need to consider the monthly MPF contribution, the expected return on investment, and the investment target after retirement.

From the given data, Mr. Lee's monthly MPF contribution is $2,000.

Assuming a consistent monthly contribution until retirement, we can calculate the future value of these contributions considering the average return on investment.

Using the future value of an ordinary annuity formula: FV = P * [(1 + r)^n - 1] / r, where FV is the future value, P is the monthly contribution, r is the average return on investment (before retirement), and n is the number of months.

FV = $2,000 * [((1 + 0.13)^(65*12) - 1) / 0.13]

FV = $1,609,340 (rounded)

So, Mr. Lee's accumulated retirement fund (before retirement) will be approximately $1,609,340.

To determine the additional savings required after retirement, we need to calculate the difference between the retirement fund required and the accumulated retirement fund.

Additional savings required = Retirement fund required - Accumulated retirement fund

Additional savings required = $613,240 - $1,609,340

Additional savings required = -$996,100 (rounded)

Based on the calculation, it appears that Mr. Lee's accumulated retirement fund will be more than enough to cover his required expenses during retirement. Therefore, no additional savings per month would be necessary.