You estimate that by the time you retire in 35 years, you will have accumulated

Question

You estimate that by the time you retire in 35 years, you will have accumulated savings of $2.2 million. a. If the interest rate is 9.0% and you live 15 years after retirement, what annual level of expenditure will those savings support? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Annual expenditure $ b. Unfortunately, inflation will eat into the value of your retirement income. Assume a 3% inflation rate and work out a spending program for your $2.2 million in retirement savings that will allow you to increase your expenditure in line with inflation. What will be your expenditure amount in real terms for each year of your retirement? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Real annual expenditure $

Explanation / Answer

We need to find the value of yearly payment from PV of annuity formula

PV of annuity = Annual spending * (1 - (1+r)^(-n))/r

where r is interest rate

and n is number of year

2200000 = annual spending * (1 - (1.09)^(-15))/.09

annual spending = $272929.54

Ans b) real interest rate will be 6% ( 9% - 3%)

2200000 = annual spending * (1 - (1.06)^(-15))/.06

annual spending = $226518.08

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