ITC Project Submission

Retirement Planning
Submitted to Prof. Pradeep Kumar

Submitted by
Group 1, Section D Abhiram R (PGP26191) Abhishek Rathore (PGP26192) Ajay Maurya (PGP26193) Akshaya Nair (PGP26194) Varun Bopanna(PGP26206)

Indian Institute Of Management, Lucknow Submitted on 23rd August

Q1. Explore the mess by answering the following questions: a) What do we know? PERSONAL INFORMATION Age Profession Spouse Mother 46 years Professor, New England Bschool Margaret, Bob is her second husband Widow,72 years, has net worth 300000 70 years, Second Marriage Mother in Law Husband, 87 years Upon death of husband her net worth is expected to be 300000-400000 Good, family history not good Glaucoma is inherited disease in family tree Serum cholestrol 190 Wants to work till Hobbies Started career Current Problem 60 -65 years Active runner and Skier When he was 34 years old How to plan retirement funds? How much is adequate? House ($) Equity ($) Rainy day fund ($) Fidelity Growth fund ($) Life insurance policy ($) 140000 40000 50000 24000 580000 QUANTITATIVE INFORMATION Working years left (years) Bob present salary ($) School's contribution to retire ent fund ($) Bob's contribution to retire ent fund ($) Research fund ($) Promotion range 19 95000

Consulting income ($)

Health

Bob's TIAA- CREF holdings* ($)

Long term bond fund Global Equity bond

20% US equities 80% Non US equities 60% 40%

b) What can we assume?  Bob will continue to live for at least 75-80 years as he is in fine physical condition  Bob will continue his job till he is 65 years old, i.e. for about 20 years more

9500 7500 21111 4% to 15%

10000 to 15000

137000

         

Bob will not increase his savings toward retirement above 10000 Bob will continue to pay the premiums towards his life insurance policy Promotion rate to be fixed at 5%, thus, school's rate of adding to his retirement fund will be 5% Bob's consulting income will be 10000 in first 9 years, 15000 in next 5 years and 20000 in next 5 years Bob contributes 2% of consulting income and research income to Retirement Fund Bob will not contribute any more money to the Social Security trust fund The Rate of Interest for Long term is 10%, Global Equity Fund (U.S) is 5% and Global Equity Fund (Non-US) is 6% The value of his house doubles at the time of his retirement The average inflation rate for the purposes of our calculations is 2% That he will wish to travel extensive within the States, and make some trips overseas as well

c) What could the result look like?  The result will show the total Retirement funds Bob has at the time of his retirement  It will show Bob s expenses, split categorically into estimated travel costs and living expenses  It will the show the maximum amount he will end up spending if he lives upto 75 or 90 d)     e)     f)   What information can be brought to bear? Bob wants to save enough to pay for her daughter's college expenses He plans extensive travel for him and his wife post retirement He wants to lead a modest life will not move from the small town he lives in, hence reasonably low inflation He does not intend to spend any money on his daughter once she is through c ollege What can we ask the client? What is the rate of interest he is earning on all mutual and long-term deposits? What minimum safety net he wishes to keep in addition to his life insurance, in case he dies? Apart from the retirement fund, how much his rough expenses are per year? Apart from the retirement fund and the mentioned investment instruments, does he also have other investments? Are there any similar situations or problems? Bob is Margaret s second husband similar to Bob s mother-in-law who has a 87 years old second husband In case Bob dies earlier than his wife then Margaret s situation will be similar to that of Bob s mother-in-law wherein she receives ownership of the house and one-third of his estate

Q2. Formulate one or more problem statements. a) b) c) d) Estimate the total retirement fund of Bob at the time of his retirement Plan the expenses of Bob post his retirement keeping in mind the various constraints Estimating net worth of Bob at the time of his death Estimate the total amount Bob should set aside per year from now in order to ensure comfortable retirement

Q3. What are the decisions, outcomes and relationships in the problem? Decisions:  How much money he should currently set aside to lead a reasonably happy life once he retires? Model:  Examines and estimates his expenses in the long run.

Outcomes:  Since we know his earnings and the model gives us his current requirements of money, the outcome of this decision gives us the maximum amount of savings Bob can make. Decisions:  How much money he requires post-retirement for travelling, his daughter s educational expenses considering the given assumption that he will have a modest living and small town residence? Model:  Examine the effect of inflation, rising living and educational costs to project the costs of Bob s family expenses and daughter s education. Outcomes:  Post retirement fund requirements for Bob

Q4. Draw an Influence Chart for the problem?

Fixed Salary

Retirement Fund

Returns from Investments

Consulting Income Income Savings Travelling Expense Expenses Decide his expenses based on assumptions about living costs Post Retirement Expenses Monthly Credit Card Charges Daughter s educational expense

Modest Living Expenses

Q5. In what ways can we simplify the problem?

  

The problem at hand is to determine the optimal savings rate of Bob keeping in mind his current expenses, income and future requirement of money. But there is no information about the current expense and the future requirement of money in the problem given By assuming a constant value for both this expense amount( predicting these values based on the prevalent living expenses in New England and travelling expenses of Europe around 20 years later) we can simplify the problem a lot

Perhaps the most important relationship in this problem is the relationship between the amount saved per month and his net retirement und. They are related in the way that as the monthly contribution o Bob goes up, so does his net overall saving. This will be an e ponential graph.

In addition to this, the more Bob and his wi e travel, their e penses become more. This will be more o a straight line graph, with e penses increasing alongwith an increase in the amount o travel Bob decides to do.

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Q7. Wh t

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We need to decompose the problem into a working li e module and a retirement module Within the working li e module, we will want to keep track o salary and other income as well as accumulating retirement assets In the retirement module, we will ollow the accumulated assets as they are drawn down or consumption We may also track certain aspects o consumption such as travel e penses These modules are nearly independent the only necessary connection is that the inal assets rom the working li e module become the initial assets in the retirement module Re er Retirement Fund Calculation (E hibit 1) Re er Post retirement E penses calculation (E hibit 2) Net worth (E hibit 3)

Q6. Wh t

odul s

Income (Variable) E penses (Assume Constant, Simpli ying criteria ) = Savings(Keeping in Mind Constant Post Retirement E pense)

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There are three main parameters o the problem  Income o Bob This includes all sources o income as well as increments in the same  Optimal Savings Bob has to do so that all his post-retirement requirements are met  E penses o Bob which include his i ed e penses and variable e penses All these three main parameters o the problem have various sub-parameters which are essential part o the problem but the entire problem can be modeled as in the In luence Chart using the above three parameters.

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Q8. Wh t

th p

t s of th p obl

Exhibit 1 Projection of retirement fund

Exhibit 2 Projection of his expenses