Your Father is 50 years old and will retire in lo years. He expects to live for

Question

Your Father is 50 years old and will retire in lo years. He expects to live for 25 years after he retires, until he is 85 years old. He wants a fixed retirement income that has the same purchasing power at the time he retires as $40,000 has today. (The real value of his retirement income will decline annually after he retires) His retirement income will begin the day he retires, 10 years from today, after which time he will receive 24 additional annual payments. Annual inflation s expected to be 5%. He currently has $100,000 saved, and he expects to earn 8% annually on his savings. How much must he save during each of the next 10 years (end of year deposits) to meet his retirement goal?

Explanation / Answer

Earning rate net of inflation = 8% - 5% = 3%

Required value of fund at T10: (Using excel formula)

=-PV(0.03,25,40000,0,1)

= 717421.68

Value of existing saving at T10 = 100000 * (1 + .03)^10 = 134391.64

Value to be acumulated through annual savings in next 10 years = 717421.68 - 134391.64 = 583030.05

ANnual savings required: (Using excel formula)

=-PMT(0.03,10,0,583030.05)

= 50858.01

He must save annually $ 50858 for next 10 years to meet his retirement goal.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.