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Will you be able to retire? Your reaction to this question 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 impor-

tant issue today, (2) employers prefer to hire people who know the issues, and

(3) professors often test students on time value of money with problems related to

saving for some future purpose, including retirement. So read on.

A recent Fortunearticle 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

2020. (3) With so few people paying into the Social Security System and so many draw-
      ing 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 stan-
      dard 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 2002, expects to live for another 20
      years after retirement, and needs 80 percent of her pre-retirement income, she would
      require $68,000 during 2002. 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 liv-
      ing, and how much would she have had to save during each working year to accumu-
      late 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.
      Fortuneand other organizations have done studies relating to the retirement
      issue, using the tools and techniques described in this chapter. The general conclu-
      sion 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.

Time Value of Money

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(^1) This chapter was written on the assumption that most students will have a financial calculator or personal
computer. Calculators are relatively inexpensive, and students who cannot use them run the risk of being
deemed obsolete and uncompetitive before they even graduate. Therefore, the chapter has been written to
include a discussion of financial calculator solutions along with computer solutions using Excel.
Note also that tutorials on how to use both Exceland several Hewlett-Packard, Texas Instruments, and
Sharp calculators are provided in the Technology Supplementto this book, which is available to adopting in-
structors.

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