MT421 Unit 9 Retirement Savings Projection Example

Age 29 to 67 in Today's Dollars: An MT421 Unit 9 Retirement Savings Projection With Two Return Paths

[Student Name]

Purdue University Global

MT421: Financial Planning

Unit 9 Retirement Savings Projection

[Instructor Name]

[Date]

Kayla Brooks, her plan rules and the Social Security figure are a composite (the benefit estimate stands in for the one on her own online statement); balances come from the year-by-year spreadsheet described, and the sources cited are real.

Inputs

Kayla is 29 and plans to retire at 67, her full retirement age for Social Security. Her salary is $58,400 and is assumed to rise 3 percent a year. Her vested 401(k) balance is $12,900. The projection assumes her deferral goes up two points this year, to 6 percent, as the Unit 4 problem set recommended. At that level the employer adds half of what she puts in, 3 percent of pay, so 9 percent of salary goes into the account each year. Returns are tested at 5 and 7 percent a year, compounded annually, with contributions added at the end of each year. Inflation is assumed at 2.5 percent a year, and every balance is also shown in today's dollars by dividing by 1.025 raised to the number of years from now.

The unvested $1,300 of match on her plan statement is excluded from the starting balance. It will vest next year if she stays, but counting it now would credit her with money she could still forfeit.

The Projection

At a 5 percent return, the balance reaches about $55,700 at age 35, $180,100 at 45, $413,500 at 55 and $835,100 at 65. At 67 it is $952,400 in nominal dollars, which is about $372,700 in today's dollars.

At a 7 percent return, the balance reaches about $59,700 at 35, $215,100 at 45, $554,600 at 55 and $1,267,600 at 65. At 67 it is $1,483,300 nominal, about $580,400 in today's dollars.

The two paths are only two percentage points apart in return, but they end more than $500,000 apart in nominal dollars, because the difference compounds for 38 years. A single return assumption presented as the answer would hide that spread.

Nearly a million dollars at 67 sounds like enough until it is restated in today's money, where it buys what $372,700 buys now.

Building the Target

The target begins with income need. Kayla's salary at 67, growing 3 percent a year, would be about $179,600 in nominal terms, or about $70,300 in today's dollars. A common planning assumption is that a retiree needs about 70 percent of final salary to maintain her standard of living, since work expenses, payroll taxes and retirement saving stop. Seventy percent of $70,300 is about $49,200 a year in today's dollars.

Social Security covers part of that. The estimate on Kayla's online statement, which projects her benefit at full retirement age in today's dollars from her earnings record, is about $24,000 a year (Social Security Administration, 2025). Her savings therefore need to supply about $25,200 a year.

The withdrawal rate converts that annual need into a balance. Bengen (1994) found, using historical U.S. returns, that a retiree drawing about 4 percent of a portfolio in the first year, adjusted for inflation afterward, would have avoided running out of money over thirty-year retirements. At a 4 percent withdrawal rate, $25,200 a year requires a balance of about $630,000 in today's dollars, or about $1.61 million nominal at 67.

The Gap

At a 5 percent return, the projected $372,700 in today's dollars falls about $257,300 short of the $630,000 target. At a 7 percent return, the projected $580,400 falls about $49,600 short. Under either assumption, a 9 percent total contribution rate does not quite reach the target.

For comparison, if Kayla stayed at a 4 percent contribution and received only the 2 percent match, her balance at 67 would be about $259,200 in today's dollars at 5 percent and $408,900 at 7 percent. The raise to 6 percent is worth roughly $113,000 to $171,000 in today's dollars, most of it from the match.

What Would Close It

The spreadsheet solves for the total contribution rate that reaches $630,000 in today's dollars. At a 7 percent return, the required total is 9.9 percent of salary, meaning Kayla would contribute 6.9 percent alongside the 3 percent match, less than one point above the projection. At a 5 percent return, the required total is 15.8 percent, or 12.8 percent from Kayla.

A step-up schedule is the practical route. If Kayla raised her contribution by one point each year from 6 percent until it reached 10 percent at age 33, her balance at 67 would be about $510,300 in today's dollars at a 5 percent return and $782,100 at 7 percent, closing the gap entirely under the higher return and cutting it by more than half under the lower one. Thaler and Benartzi (2004) found that employees who committed in advance to raising contributions with each pay increase saved substantially more than those who decided each year, and many plans now offer an automatic increase feature that works the same way. Madrian and Shea (2001) showed how strongly default settings shape what employees save, which is why setting the escalation once, in the plan's system, is more reliable than deciding again each year.

Limits of the Projection

The projection uses steady returns, while real returns vary from year to year, and a poor decade near retirement would leave her short even at a 7 percent average. The salary growth, inflation and Social Security figures are all estimates. The projection should be rerun every year with the new statement balance, salary and benefit estimate, and the step-up should be reviewed once the debt plan is finished and the money it now takes each month is freed for saving.

References

Bengen, W. P. (1994). Determining withdrawal rates using historical data. Journal of Financial Planning, 7(4), 171-180.

Madrian, B. C., & Shea, D. F. (2001). The power of suggestion: Inertia in 401(k) participation and savings behavior. Quarterly Journal of Economics, 116(4), 1149-1187. https://doi.org/10.1162/003355301753265543

Social Security Administration. (2025). Retirement benefits (Publication No. 05-10035). https://www.ssa.gov/pubs/EN-05-10035.pdf

Thaler, R. H., & Benartzi, S. (2004). Save More Tomorrow: Using behavioral economics to increase employee saving. Journal of Political Economy, 112(S1), S164-S187. https://doi.org/10.1086/380085