IET 35000 Engineering Economics
Case Study 2 – A Simple Retirement Calculator
I hope you will enjoy doing this calculation for your own personal situation. But feel free to
make up any numbers as you move through this case study if you are uncomfortable with
sharing your personal details.
Using the time value of money (TVM) principles that we have learned, develop a simple
retirement calculator using the following steps. Submit an Excel file showing your calculations
and answers to the questions below.
Step 1: Calculate the future value of the money you will need.
A. How old are you now?
B. At what age do you want to retire?
C. Assume you will live until the age of 90.
D. In today's dollars, how much will you need each year for retirement? You can change
this value if you want. For example, you might say that you want $40,000/year for the
first 10 years of your retirement, $ 50,000/year for the second 10 years...and so on. Or
you can choose one set amount for each year. To answer this question, factor in such
questions like:
a. Will your house be paid off?
b. Will you travel a lot?
c. How comfortable do you feel about Medicare? How much do you think you will
need for medical care/medicine?
E. For each year in your retirement, calculate the future value of the answer in part D
assuming a 3% inflation rate. For example. If I am 35 years old, want to retire when I
am 65, think I will die at 95, and want $50,000 a year in today's dollars. I will first
calculate the future value of $50,000 30 years in the future at 3%. Then I will calculate
the future value of $50,000 31 years in the future at 3%. Then I will calculate the future
value of $50,000 32 years in the future at 3%...and so on… I will do this calculation 30
times total...since I have 30 years of retirement. This should not take much time. Once
you set up your first formula, you can copy and paste 30 times and then just adjust the
year in each of your 30 equations. If you changed your yearly needs as you moved
through retirement, please make sure you account for that in your calculations.
Step 2: Calculate the present value of the money you will need for retirement
A. Choose two rates of return you would like to investigate. I chose a lower conservative
number (a number that I felt sure I would get) and I chose a higher more aggressive
number. You can choose whatever you want.
B. For each of the future values you calculated in Step 1, bring them back to the present
value using both of the two rates you chose above. You will have two columns...1 for
each rate. Sum up these present values and this is the amount of money you would
need today to meet your retirement needs…assuming two different rates of return.
C. Subtract any money you currently have saved up right now for retirement. Include
401Ks, IRAs, or any other money earmarked for retirement.
D. This new number is the amount of money you need to save up over the years until you
retire.
Step 3: Calculate the annual amount you need to save up
A. Take the number you calculated in Step 2, Part D above and using the time value of
money formulas; calculate the equivalent annual amount for each of the two rates of
return you chose in Step 2, Part A above. This is the amount you will need to save each
year to achieve your retirement goals. Divide by 12 to get a monthly number.
Questions:
1. Are you surprised by the number? Do you think you will be ready for retirement?
2. Cite four assumptions this simple retirement calculator takes into account. Or another
way to phrase this question…name four things that this simple retirement calculator
does not take into consideration.
This case study should not take very much of your time. If you find that it is, you need to call me
right away and I can steer you in the right direction. Setting up TVM formulas in Excel and then
copying and pasting is the way to go. If you need help, then please contact me.
NOTE: To receive credit, you must complete the retirement calculator like I have stated. If you
complete any other retirement calculator on the internet, you will not get any credit. The
purpose of this case study is to use the TVM formulas we have used.