You want to buy a cabin at retirement in 20 years. You have shopped around and p

Question

You want to buy a cabin at retirement in 20 years. You have shopped around and predict that a cabin to your liking will cost $500,000 in 20 years. This is based on an assumption of inflation being 3% per year. You want to save money at the end of each year for the next 20 years to fund this goal. Instead of fixed payments you want to make payments that increase each year by inflation. What is your first year's payment (rounded to the nearest dollar) if you expect to earn 8% annually on your savings?

Explanation / Answer

500,000 = P*(1.0820 - 1.0320)/0.05

where P is the first paymet made

P = 8,757.04

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