Business Modeling - Retirement Planning - Case Study Example

Running Head: Business Modeling: Retirement Planning Business Modeling: Retirement Planning Business Modeling: Retirement Planning Introduction Retirement is the term given to coming to an end of your employment days. This differs from one country to another depending on their rules (Brigham, 2009). Retirement age is the age that is decided by the government to be the limit of an employee to work. On attaining this age one ought to retire and enjoy the rest of his remaining days at home as he enjoys his retirement benefits (Brigham, 2009). Retirement benefits are the benefits that one enjoys after retirement due to the contributions made by both the employee and the employer. The contributions were made through a retirement scheme. Retirement scheme is an arrangement made by an employee and an employer, which both parties will contribute equally for the future benefit of the employee; during his retirement (Brigham, 2009). Problem statement The need for a retirement plan for the old days is the key concern in this case. This calls for employees to properly plan and budget on their retirement using their salaries. However, the person getting into this plan should ensure save for his or her future while running his daily life with his own income. That is, all income should not be directed to retirement planning as the current expenditure must be taken care of. Retirement planning is a budget that people do in their early life; most of the time when they start working. They base their budget on their income and speculations of their future prosperity. Some of this people seek guidance from economists who can predict factors that affect this plan. These factors include interest rates, inflation, insurance policies and lastly pension (Larimore, 2011). Bob in this case wants to find out how to balance his future savings and still maintain the current lifestyle. In other words, he wants to know how much to save from his salary and the other sources of income that he has liked the stock and bonds (Larimore, 2011). The University of Washington Retirement Plan is an income tax distinct payment arrangement that is meant to help people put aside some money for their use in the future when they retire. Recruits can begin to contribute to the UWRP on the same day they are informed of the UWRP rendezvous. The UW helps you keep aside even more money by availing the best resources to your own savings. All the UW and the staff savings are instantaneously invested, and the arrangement is movable if you happen to leave the UW (Hebeler, 2011). Influence Plan The amount you can save with the help of UWRP is resolute by your maturity and focus to your savings confinement as shown below. How old you are your savings UW’S Savings Sum of UWRP Savings Below 35 5% 5% 10% 35- 50 7.5% 7.5% 15% 50 and above 10% 10% 20% This scheme can be very useful and also easy to understand to people with a steady and regular salary so as to enable them to plan well based on their salary (Hebeler, 2011). Bob in this case is a ware house supervisor earning $116000 per year. He therefore falls under the second category of the UWRP scheme, which is 35-50 years. He therefore contributes 7.5% of his salary which amounts to $8700. UW will contribute the same to this effect according to the rules of the UWRP scheme. Retirement Planning Model Below is a probability simulation bar graph of the possible outcomes Probability simulation could be used to reveal the actual risks of the retirement arrangements that most models fail to show. A fundamental retirement planning model should have the savings that were made before retirement. This is an anticipated gain on the retirement amount, and an episodic use of money on retirement. This model can be important in the percentage of the savings that is needed in order to archive the desired future goal. It also determines how much one could be spending in the future so as not to find yourself overspending and the worst that can happen is spending all your money before your time on earth is up (Hebeler, 2011). Below is a simplification of the above graph The Retirement Variables Year to begin 2013 Beginning Balance $ 120000 Anticipated gain 7.9% Standard Deviation of Gain 3% Annual Contribution until Retirement $35000 Year of Retirement 2027 Annual Usage after Retirement $350,000 This model is too simplified that it doesn’t put into consideration such variables like insurance and tax. The most important thing about this model is that, due to its usage of a chart one can play around with figures and therefore drawing various charts to suit the figures, which in this case is money. This can be done until you get the right graph to be used for your retirement plan. People have different appearances of their chats because of the difference in their salaries and other parameters that are used in constructing a retirement model. It would be easier for one to include all their sources of income while constructing the model in order to decrease the probability of getting the wrong graph (Mezzulo, 2010). Report From the case study, we are informed that Bob is a 46 year old man, with a wife and one daughter. He is the sole provider of the family since the wife does not earn much from her job. He will retire when he reaches 65 years old. He pays 35% of his salary to the government as tax and another 10% as Guarantee levy. This amounts to $180656.85 leaving him with a net income of $147810.15. Bob makes a contribution to his super annual fund which is estimated at $9500. The highest one can contribute is $12000 per annum and is predicted that it will increase in the future to $15000 that is in some five years to come. It is also predicted that threshold will increase the same rate as inflation. All this totals to $167000, even though he will not gain much from the contribution. Bob has made some investments in the stock and bond market 50% each to increase his annual return. This gives him a return of 7%. He also gets $200000 from house equity, long term yearly returns of 3%, $50000 short term market mutual funds. Bob gets $24000 in a growth and income fund and a long run medium yearly gain of 6%. Bob other than essential expenses at home like clothes, food and shelter, he pays for life insurance premiums whose face value is $600000 so long as the premiums are paid as agreed. He also pays for his mortgage whose principal is $200,000 and whose interest rate is 7%. Recommendation Using this information it becomes easier for one to use the data to construct a bar graph that will suit one’s lifestyle. Bob’s bar graph consists of years when he starts saving to the year when he retires; that is the x axis. The Y axis has the income that Bob gets including the other income from the investment that he has made; Equity, stock and bond. The blue bar shows the highest amount Bob can contribute as years go by and also putting into consideration the chances that his salary may increase by 3% (Hebeler, 2011). The red bar shows the fixed amount that Bob and his family is able to use after retirement. This is determined in such a way that one can know the maximum amount one can use without the fear of overspending (Hebeler, 2011). The green bar shows the minimum amount one can save in the working years which is not likely to go for so many years. This mostly occurs because the salary whose savings are being deducted from is very minimal. It is seen that savings increase as the years goes by. This is due to an increase in salary, gain from equity, stock and bond increases. In this case it is assumed that the dollar will appreciate in value and that the companies where he has invested in will make profits in the coming years at least until his retirement (Hebeler, 2011). The auto return amount has a very small deviation because they will not use the same amount of money every year. Some years it will less than the estimated amount and some years it will be more than so as to meet the needs and wants of the family. In this case, Bob desires to travel a lot with his wife on retirement and so trips to the various places may cost differently no mentioning the variation in other expenses as food and a place to stay when they are gone. The minimum amount will mostly occur when one looses his job but still wants to continue making the contributions mainly from his other sources of income like part time job or some businesses he owned as he was working. If Bob follows the estimated amount that he is needed to save according to the bar graph, though one cannot be too accurate, then he will have no hard time after retirement. He will travel a lot like he wants to and he will also have saved enough for his daughter education; that is her university fee. Scenario Manager According to the information gathered from the graph if Bob wants to achieve his future goals, then he should do his best not to loose his job and he should do away with contributions that will not help him achieve his goal. One of the contributions he is making is the sacrifice to the super annual fund that will not be of much benefit and instead invest in a more profitable deal like purchasing more stock and bond, something that will earn him some interest and something that grows as years goes by. Bob has a major share of his income coming from his investment than his salary. This is because of the deduction of the tax levy and guarantee levy which takes 45% of his salary. Even with the speculation of the increase of his salary, tax increases as salary increases and so it will not make much of a difference. Data Validation The life insurance policy whose face value is $600000 is also a good investment for his family after his death. This is because his wife and daughter will be able to benefit from it all. He can secure their life after his death even more by increasing the amount of premium he is paying for the life insurance policy. To curb the inflation that was announced by the government, it is advisable for Bob to reach an agreement with his employee and company so that they can increase his salary when there is inflation. This is because prices of items go high and this only means that the expenses increase also. As for the mortgage Bob should also come into an agreement with them that the interest rate should not increase as the inflation rate goes up; the rate should be fixed to enable him to plan himself. Bob should also be fully informed when it comes to how his stock and bond are doing. If he realizes that the company he has invested in is not doing well and that it might drag him, he should move to another company that is economically doing well. For the bond, Bob should buy short term bond so as to predict whether to buy it immediately after or after a while when they are more profitable (Larimore, 2011). References Ezra, Don, Collie, Bob, & Smith, Matthew X. (2009). The Retirement Plan Solution: The Reinvention of Defined Contribution, Epub Edition. John Wiley & Sons Inc. American Library Association., & Brigham, H. F. (2009). Retirement plan. Chicago, Ill. Larimore, T. (2011). The Bogleheads guide to retirement planning. Hoboken, N.J: Wiley. Hebeler, H. K. (2011). J.K. Lassers Your Winning Retirement Plan. New York: John Wiley & Sons. Mezzullo, L. A., & American Bar Association. (2010). An estate planners guide to qualified retirement plan benefits. Chicago: Section of Real Property, Probate, and Trust Law, American Bar Association. Read More