Consider the case of Mike

Consider the case of Mike. He is just about to turn 62 years of age and he has come to you to help him determine if/when he can retire. Mike has provided you with the following information:

His current earnings are $100,000 annually

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He used a “Top Down” retirement assessment and determined that his retirement cash needs would be equal to his annual earnings less his FICA tax, his mortgage of $1320/month, and $5,000 per year of business/work related expense.

He does estimate that each year he waits to retire, his cash flow needs will increase by 2%. Once he is retired, he should experience stable cash flows.

He currently has $425,000 in his retirement account.

He believes he should be able to earn a 6% rate of return on his retirement account.

His Social Security statement indicates he should receive a payment of $2,685 per month at his full retirement age (FRA) of 67. He is aware that his social security payments are reduced if he starts taking payments early, and they will increase if he defers taking social security payments after age 67.

Mike expects to live until age 95.

He is interested in using an annuity method of capital needs analysis.

Considering this fact pattern, Mike wants to know the following:

1.    Can he afford to retire now, at age 62, based on his current retirement account value, reduced social security and cash flow needs?

2.    Can he afford to retire at his FRA of 67? If he is short of capital, how much would he have to save each year to meet his goal?

3.    Can he afford to retire if he waits until age 70? If so, how much cash flow could he have if he used a Capital Preservation strategy and assumed his 6% rate of return is sustainable?

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