MAT 245 Module 8 Retirement and Estate Planning Example

Meeting Taylor at 67: A Retirement Projection, a Plan to Save Future Raises and a Starter Estate Plan

Student Name

Business Administration Program, Aspen University

MAT 245: Personal Finance

Instructor Name

Month Day, Year

Meeting Taylor at 67: A Retirement Projection, a Plan to Save Future Raises and a Starter Estate Plan

Taylor Monroe's financial plan began in Module 1 with a negative net worth and a credit card balance. Seven modules later the card is paid, the emergency fund is growing, insurance covers the large risks and the 401(k) sits in one low-cost fund. The last question is the one furthest away: whether Taylor will have enough at 67, and what happens to Taylor's assets if something happens sooner. This paper projects retirement needs and savings, closes the gap it finds and sets out a starter estate plan. Both Taylor and the numbers are made up for teaching.

How Much Taylor Will Need

The projection works in today's dollars, so every figure can be compared with Taylor's life now. A common planning target is about 70% to 80% of pre-retirement pay, because work expenses and retirement saving stop and taxes usually fall. Using 75% of $68,000 gives a target of $51,000 a year. Taylor's Social Security estimate, from the online account at the Social Security Administration, is about $24,000 a year at 67 in today's dollars. Savings must therefore supply about $27,000 a year. At a withdrawal rate of 4% a year, a common cautious rule, that requires a portfolio of about $675,000 at 67.

The Current Path

Taylor now saves 4% of pay and receives a 4% match, $5,440 a year. The projection assumes a return of 4.5% a year after inflation, roughly what a portfolio heavy in stocks early and more balanced later might earn, and holds pay flat in today's dollars.

The shortfall is modest, but it rests on assumptions that could easily go the wrong way, such as lower returns, years out of work or a return to school. A plan that just reaches the target leaves no margin, so the escalation path aims well above it.

Why Defaults Decide So Much

Madrian and Shea (2001) studied a large company that switched its 401(k) from requiring employees to sign up to enrolling new hires automatically unless they declined. Participation among new employees rose dramatically after the change. But the default also had a cost: many automatically enrolled workers stayed at the default contribution rate of 3% and in the default money market fund, choices few workers had made when they signed up on their own. The authors attributed the pattern to inertia and to employees reading the default as advice. Taylor's 4% contribution is itself the product of inertia: it was raised from 2% to capture the match and has not moved since.

Saving Future Raises

Thaler and Benartzi (2004) designed Save More Tomorrow for workers who wanted to save more but found it painful to cut current spending. Participants committed in advance to raising their contribution rate each time they received a raise, so take-home pay never fell, and they could leave the program at any time. Most who joined stayed in it, and their average saving rate rose from 3.5% to 13.6% over about forty months. The design used the same inertia Madrian and Shea observed, but pointed it toward more saving.

Taylor's plan copies the design. Taylor's 401(k) offers automatic escalation, which raises the contribution by one percentage point each January. Taylor will turn it on, set the cap at 10%, and time the step with the yearly raise, so each increase takes only part of the raise and take-home pay keeps rising. Including the match, the combined rate reaches 14% in six years.

Meeting the Future Self

Hershfield et al. (2011) asked participants to interact with digitally aged images of their own faces in virtual reality and other formats. Those who saw their aged selves allocated more money to a hypothetical retirement account and were more willing to accept later rewards over immediate ones than those who saw their current selves. The authors argued that people often treat their future self almost as a stranger, and that making that self vivid makes saving feel like caring for someone real. This paper describes Taylor at 67, a retired hygienist with a paid-off home in plans and an income of $63,600 in today's dollars, for that reason; Taylor also saved the Social Security statement and the projection in a folder labeled with the year 2066.

Estate Planning for a Single Adult

Taylor's estate is small now, but estate planning decides who acts and who receives, not only how much. Module 6 added a will, a health care power of attorney and a durable financial power of attorney, and named beneficiaries on the 401(k) and the employer's life insurance. Module 8 completes the plan. Beneficiary designations override the will, so they come first and must be checked after any major life event. Taylor's checking and savings accounts will carry payable-on-death designations, so the balances pass directly without probate. If Taylor later buys a home, Ohio law allows a transfer-on-death designation affidavit to be recorded so the property can pass the same way. Federal estate tax applies only to estates many times larger than Taylor's will ever likely be, so the plan focuses on getting assets to the right people quickly.

Reviewing the Whole Plan

Every November, Taylor will review insurance at open enrollment, check the 401(k) contribution and beneficiaries, update the net worth statement and rerun this projection with the new Social Security estimate. Any major event, such as marriage, a child, a home purchase or a new job, triggers a full review of the estate documents.

Conclusion

On the current path, Taylor would retire with about 72% of current pay. Linking contribution increases to raises lifts that to about 94% without cutting take-home pay. Madrian and Shea show why defaults matter, Thaler and Benartzi show how to commit future raises to saving and Hershfield and colleagues show why picturing the future self helps. The estate checklist makes sure Taylor's assets reach the right people.

References

Hershfield, H. E., Goldstein, D. G., Sharpe, W. F., Fox, J., Yeykelis, L., Carstensen, L. L., & Bailenson, J. N. (2011). Increasing saving behavior through age-progressed renderings of the future self. Journal of Marketing Research, 48(SPL), S23-S37. https://doi.org/10.1509/jmkr.48.SPL.S23

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

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