Peter Griffin planes to retire in 20 years (1st withdrawal in year 21). He is to

Question

Peter Griffin planes to retire in 20 years (1st withdrawal in year 21). He is told by Glenn Quagmire that he will need about $135,000 per year to fund his retirement. Peter wants to be able to maintain that level of purchasing power forever (Assume inflation = 3% per year). Peter plans to increase his savings by 4% per year and expects to earn 7% per year on his investments.

1) What is Peter's retirement number? That is, how much does Peter need to have saved by the end of year 20?

2) How much does Peter have to save the first year to fund his retirement goal?

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Explanation / Answer

1)Peter's retirement number = withdrawal in year 21/(r-g) = 135000/(7%-3%) =$3,375,000

2) Present value of retirement fund = 3,375,000/1.07^20 =$872164.1345

Present value of all savings = Present value of retirement fund

lets first year saving be x

savings increase by 4% each year

872164.1345 = x/1.07 + x*1.04/1.07^2 + x*1.04^2/1.07^3........x*1.04^19/1.07^20

x=$60,319.51

Peter needs to save $60,319.51 the first year to fund his retirement goal

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