Question

I plan on retiring at 70 years of age. I want to retire with a net income of $105,000 a year, total. I anticipate that social security will fund $20,000 of this total, but the social security will be taxable at 25%. The other portion is a ROTH IRA and not taxable at retirement.

Please provide the following answer: Assuming I invested in a ROTH IRA, and the IRS wants 25% of my income at retirement, how much a year beginning at 25 to age 70 will I need to set aside/invest at 11% interest to achieve my investment goal?

Answer 1

a.) FUTURE VALUE OF INVESTMENT TO BE MADE TODAY, I.E. INCOME REQUIRED AT RETIREMENT:

Net income required on retirement= $105,000

Less: Amount funded by social security net of taxes [ $20,000- (25% of $20,000)] ($15,000)

Add: Amount to be given to IRS on retirement [ 25% of income at retirement $26,250

= 25%*$105,000 = $26,250]  

Therefore, future value of investment, i.e.gross income required on retirement $116,250

b.) Time period for investment= Retirement age- No.of years completed = 70 years- 24 years = 46 years

c.) Rate of interest= 11%

Hence, amount to be invested every year to achieve the investment goal:

Annual Investment= FV / {n+ [n(n+1)/2 * r]}

where, FV= Income on retirement; n= Time period; r= Rate of interest

= $116,250 / { 46+ [46(46+1)/2 * 11%]}   = $704.930 is the annual investment to be made