A recent college graduate has taken a new job at Work LLC and since the company

Question

A recent college graduate has taken a new job at Work LLC and since the company does not offer a traditional pension plan, she plans to take advantage of a tax-free investment account backed by a reputable financial institution that offers a guaranteed 8% annual return for as long as she lives. The graduate plans on working for 45 years before retiring and will save a fixed amount each year until retirement, starting at the end of this year and continuing for all 45 years of work. Once she is retired, she expects to be able to live on the equivalent of $30,000/year in today

Explanation / Answer

AT T45, She needs $30000 pa till perpetuity & Inflion rate 4%. So Post T45, Her reqd rate of return will be 8%+4% = 12%. So PV of perpetuity at T45 = 30000/12% = $250,000 Now we have Rate = 8%, nper =45Yrs, PV=0, FV= $250,000 SO Annual Saving reqd = PMT(Rate,nper,PV,FV) = PMT(8%,45,0,250000) = $647

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