Time Value of Money

Your next assignment as a financial management intern is to apply the knowledge that you acquired while engaging in the time value of money discussion that you had with your colleagues. In this task, you will be building the foundation for a retirement plan using the concepts presented in this phase. This individual project deals with two timelines: years before retirement (pre-retirement stage), years during retirement (retirement stage).

Part 1

For the first part of this plan, we need to calculate the rate of return of our retirement savings will earn until we reach our retirement age (67 years old). To do this we are, you will need to estimate the 5-year average rate of return of the stock market (you should use the S&P 500 stock index, which can be researched at finance Web sites) using the table below:

After calculating the 5-Year Return on the S&P 500 Index (RATE), determine how long it will take for an investment to double using the Rule of 72. Now that you have an understanding of the return in the market, you need to think about planning for future retirement.

Part 2

For the 2nd part of this plan, we need an understanding of how much money an individual would need in the future for retirement. For this step, assume an individual needed the following amounts to retire, how much would he or she have to invest today?

The future value of the accounts is given in the table below.

The rate of return we are assuming will be the 5-Year Return on Top 500 Stocks you calculated in the previous step.

For the years to retirement, assume retirement age is 67. Calculate the difference between retirement age and the current age of an individual (i.e. 30, 20, 30 years).

Now you are ready to calculate the present value of the following amounts (FV of Account).

• $1,000,000
• $2,000,000
• $4,000,000

Part 3

For the 3rd part of this retirement plan, you will need to estimate the future cost of 3 lifestyles assuming an inflation rate of 3% and the number of years before you turn 67 years old. Below are three different lifestyles to consider:

• Basic: Current cost = $50,000
• Comfortable: Current cost = $100,000
• Luxury: Current cost = $150,000

You will use the same number of years to retirement (NPER) as you calculated in the previous step.

In the table below, calculate the future value of the current lifestyles.

Part 4

For the 4th part of this retirement plan, you will utilize the FV of the Life Styles you calculated in the previous step to understand how much money an individual will need to have saved to get through the retirement stage.

To do this, you will need to estimate the life expectancy of the retiree. Based on current averages, the life expectancy of an individual is 90 years of age. Now, you can subtract the life expectancy of the retiree from 67 (the retirement age) to determine the number of years in during the retirement stage (NPER, given 23 years).

The rate of return that will be used is adjusted for 3% inflation. (hint: the inflation adjusted amounts will be the payment as you will be calculating the present value of this annuity using a rate of return of 12%).

In the following table, calculate the total amount that will need to be saved to get through the retirement stage (Required Value at Retirement).

Part 5

For the 5th part of this retirement plan, calculate the annual contribution that needs to be made to have each required amount at retirement. This is one of the most important parts of this plan, as this is the amount an individual needs to save each year before reaching the retirement stage.

To determine the annual contribution, in the table below, use the amount that you calculated in the previous step (Required Value at Retirement) the market rate of return you calculated in the 1st part of the plan, and the number of years to retirement in the 2nd part of the plan.

After completing the required calculations, explain your results in a Word Document and attach the spreadsheet showing your work. Be sure to explain the following:

• • The difference between present and future values
  • How the present value and future value calculations are calculated and related
  • The difference between compounding and discounting

Note: You can find information about the top 500 stocks at this Web site.

Reference

S&P 500 index chart. (2014). Retrieved from the Yahoo! Finance Web site: http://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

Be sure to document your paper with in-text citations, credible sources, and list of references used in proper APA format.

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