ITC

Project Submission

Retirement Planning

Submitted toProf. Pradeep Kumar

Submitted byGroup 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 QUANTITATIVE INFORMATION

Age 46 years Working years left (years) 19

ProfessionProfessor, New England B-

school Bob present salary ($) 95000

SpouseMargaret, Bob is her second

husbandSchool's contribution to retirement

fund ($) 9500

MotherWidow,72 years, has net worth

300000Bob's contribution to retirement

fund ($) 7500

Mother in Law

70 years, Second Marriage Research fund ($) 21111

Husband, 87 years Promotion range 4% to 15%

Upon death of husband her net worth is expected to be 300000-400000 Consulting income ($) 10000 to 15000

Health

Good, family history not good

Bob's TIAA- CREF holdings* ($) 137000Glaucoma is inherited disease in family tree

Serum cholestrol 190

Wants to work till 60 -65 years House ($) 140000Hobbies Active runner and Skier Equity ($) 40000Started career When he was 34 years old Rainy day fund ($) 50000

Current ProblemHow to plan retirement funds? Fidelity Growth fund ($) 24000How much is adequate? Life insurance policy ($) 580000

Long term bond fund 20%

Global Equity bond 80%US equities 40%

Non US equities 60%

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 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) 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 college

e) 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?

f) 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) Estimate the total retirement fund of Bob at the time of his retirementb) Plan the expenses of Bob post his retirement keeping in mind the various constraintsc) Estimating net worth of Bob at the time of his deathd) 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?

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

Income (Variable) – Expenses (Assume Constant, Simplifying criteria ) = Savings(Keeping in Mind Constant Post

Savings

Income

Expenses

Fixed Salary Retirement Fund

Consulting Income

Decide his expenses based on assumptions about living costs

Returns from Investments

Monthly Credit Card Charges

Post Retirement Expenses

Modest Living Expenses

Daughter’s educational

expense

Travelling Expense

Retirement Expense)

Q6. What modules we need to build?

We need to decompose the problem into a working life module and a retirement module Within the working life module, we will want to keep track of salary and other income as well as accumulating

retirement assets In the retirement module, we will follow the accumulated assets as they are drawn down for consumption We may also track certain aspects of consumption such as travel expenses These modules are nearly independent: the only necessary connection is that the final assets from the working-

life module become the initial assets in the retirement module Refer Retirement Fund Calculation (Exhibit 1) Refer Post retirement Expenses calculation (Exhibit 2) Net worth (Exhibit 3)

Q7. What are they key relationships in the problem? Draw their graphs.

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

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

Q8. What are the parameters of the problem?

There are three main parameters of the problem: Income of Bob – This includes all sources of income as well as increments in the same Optimal Savings Bob has to do so that all his post-retirement requirements are met Expenses of Bob which include his fixed expenses and variable expenses

All these three main parameters of the problem have various sub-parameters which are essential part of the problem but the entire problem can be modeled as in the Influence Chart using the above three parameters.

Exhibit 1 – Projection of retirement fund

Exhibit 2 – Projection of his

expenses

RETIREMENT FUND CALCULATION (all figures in $)

YearIncomeSchool's

contribution Bob's contribution

To retirement fund @ 2% per year

Expenses (Logical Assumptions)

Travelling Expenses