ISBN: 0-03-028931-9

Chapter 7 Time Value of Money

Your reaction to the question in the title of this vignette is probably, ``First things first! I'm worried about getting a job, not retiring!'' However, an awareness of the retirement situation could help you land a job because (1) this is an important issue today, (2) employers prefer to hire people who know the issues, and (3) professors often test students on the time value of money with problems related to saving for some future purpose, including retirement. So read on.
A recent Fortune article began with some interesting facts: (1) The U.S. savings rate is the lowest of any industrial nation. (2) The ratio of U.S. workers to retirees, which was 17 to 1 in 1950, is now down to 3.2 to 1, and it will decline to less than 2 to 1 after year 2000. (3) With so few people paying into the Social Security System, and so many drawing funds out, Social Security may soon be in serious trouble. The article concluded that even people making $85,000 per year will have trouble maintaining a reasonable standard of living after they retire, and many of today's college students will have to support their parents.
If Ms. Jones, who earns $85,000, retires in 2000, expects to live for another 20 years after retirement, and needs 80 percent of her pre-retirement income, she would require $68,000 during 2000. However, if inflation amounts to 5 percent per year, her income requirement would increase to $110,765 in 10 years and to $180,424 in 20 years. If inflation were 7 percent, her Year 20 requirement would jump to $263,139! How much wealth would Ms. Jones need at retirement to maintain her standard of living, and how much would she had to save during each working year to accumulate that wealth?
The answer depends on a number of factors, including the rate she could earn on savings, the inflation rate, and when her savings program began. Also, the answer would depend on how much she will get from Social Security and from her corporate retirement plan, if she has one. (She might not get much from Social Security unless she is really down and out.) Note, too, that her plans could be upset if the inflation rate increased, if the return on her savings changed, or if she lived beyond 20 years.
Fortune and other organizations have done studies relating to the retirement issue, using the tools and techniques described in this chapter. The general conclusion is that most Americans have been putting their heads in the sand – many of us have been ignoring what is almost certainly going to be a huge personal and social problem. But if you study this chapter carefully, you can avoid the trap that seems to be catching so many people.

DISCUSSION QUESTIONS

1. What steps, if any, have you taken in regards to retirement planning? Savings accounts, investment accounts, or IRA's?
2. When do you think it is a good time to begin thinking about retirement? Is it ever too early?
3. Do you plan to rely on your personal investments or Social Security when it comes to retirement? Why?

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