Question

You are 35 years old, and have not saved any money yet. You hope to retire at age 65, with a sustainable income of $150,000 per year of current buying power. You assume that inflation will be 3.1% and the fund you want to invest in will return 7.61% per year from now until your death.

1) What is that amount in future actual dollars? $

2) how much do you need to save each year to reach your savings goal? $

Answer 1

Solution:-

(1). Inflation rate is = 3.1%

Duration up to retirement age = 65 - 35 = 30 years

Money do you need in today's dollars to reach your income goal = Required sustainable income per year at current buying power / Real rate of return = $150,000 /5.39% = $2,782,931

Future Value Interest Factors for One Dollar Compounded at 3.1% for 30 Periods = 2.498964

Amount in future actual dollars = $$27, 82,931 * 2.498964 = $6,954,445

(2). Future Value Interest Factors for a One-Dollar Annuity Compounded at 8.49% Percent for 30 Periods = 134.5144

Required saving each year to reach the savings goal = $6,954,445 / 134.5144 = $51,700