Faculty Scholarship 1994 - Present

Application of Gordon's Constant-Growth Dividend Valuation Model to Estimating Retirement Funding Requirements

Since the advent of 401 (k) and similar defined contribution retirement plans the number of defined benefit plans has declined. As a consequence, workers are increasingly responsible for both estimating and investing to meet their retirement income objectives. Specifically, they need to estimate how much retirement income they will require in addition to expected Social Security benefits to ensure their long-term financial well-being. This paper examines the use of Gordon's Constant-Growth Dividend Valuation Model to estimate the accumulation needed at retirement to provide a desired level of income. Estimating the accumulation needed at retirement generally requires present value calculations incorporating actuarial as well as expected investment return and inflation estimates. Estimates of life expectancies are changing and may change much more rapidly as the results of stem cell and other cutting edge research are integrated into medical treatments. Furthermore, the Bureau of Labor Statistics' little-known CPI-E index indicates inflation for the ederly is rising faster than for the rest of the population. Gordon's Constant-Growth Dividend Valuation Model is a simple yet powerful tool that can be used to estimate the accumulation to fund retirement, taking into account inflation and extended life expectancies.