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Exercise 2.1: Retirement Planning Question 1 (a) What do we know?

age salary assets goals family situation (b) What can we assume? he keeps his job he lives into retirement parents leave no estate (c) What could the results look like? recommended plan optimal savings rate graph showing effect of increasing savings rate on assets at retirement strategy for increasing savings (d) What information can be brought to bear? typical income needs in retirement historical rates of return on assets expected lifetimes (e) What can we ask the client? how early would he like to retire? how risk averse is he in investing? how much would he like to spend on travel in retirement? does he want to leave an inheritance to his heirs? how does he feel about seeking more consulting income? how easily can he save another 5% of his income? 10%? (f) Similar situations or problems? asset accumulation budgeting risk analysis Question 2 Problem statements: In what ways could Bob? increase his savings rate increase his income (pre- and post-retirement) decrease his consumption ensure adequate retirement assets Question 3 Decisions savings rate percent of income for all years pre-retirement percent of income varying by year pre-retirement

dollar amount for all years pre-retirement dollar amount varying by year pre-retirement consulting income consumption post-retirement percent of final salary percent of final salary in first year, changing by a growth rate dollar amount each year percent of assets in all years percent of assets in first year, changing by a growth rate Objectives maximize assets at retirement maximize allowable percent of final salary maximize number of years assets are adequate minimize probability of negative assets at death minimize probability of running out of assets by age 90 ensure no more than a 10% chance of running out of assets by death of longest living spouse Constraints adequate consumption spending reasonable rates of return on assets support elders in old age Question 4 (see below) Question 5 Ways to simplify lump all consumption into one quantity used fixed rates of return ignore tax effects ignore asset allocation problem assume spending post-retirement is a percentage of final salary ignore inheritances fix date of death ignore uncertainty generally Question 6 Pre-retirement module income consumption savings assets Post-retirement module consumption assets

Question 7 Key relationships geometric growth of income and assets to retirement decline of assets post-retirement (exact shape depends on model) Question 8 Parameters income: base and growth rate base assets rates of return on assets age of retirement age of death retirement consumption: percent final salary

Date of Retirement

Date of Death

Savings Rate

Assets at Retirement

Final Wealth

Initial Assets

Investment Return

Post-retirement Consumption Rate