Question

Sara is 20 years old and plans to live until she is 80. Her behavior is consistent with the life-cycle hypothesis and she intends to perfectly consumption smooth. For simplicity, assume that the interest rate is zero (i.e. there is no discounting of future dollar amounts).

a. Sara is currently earning $120,000 a year. She will earn this same salary across her whole career and then retire when she is 70. How much does she spend each year in order to perfectly consumption smooth? Explain briefly.

b. Suppose now that Sara has to go to medical school for ten years (earning no income there). She then works from age 30 to age 70, earning $120,000 a year, followed by ten years of retirement. If Sara perfectly consumption smooths, how much does she spend each year?1

c. (Extra credit) Explain how liquidity constraints might present a problem for Sara to achieve the consumption plan in (b).

Answer #1

**A.** Sara will work for a total of 70-20=50
years. In these 50 years, she will earn

50*120000=6000000.

She will spend these equally over 80-20=60 years, for a smooth consumption. So, each year she should spend

6000000/60=**100000 per year.**

**B.** Now she will earn for 40 years.

Total earnings=40*120000=4800000

Spending per year for a smooth spending=4800000/50=**96000
per year.**

**C.** As Sara spends less each year than she earns
(because she is saving for retirement), she will be
depositing/investing this extra money. Often, these investments are
not liquid. This means that it is not easy to convert them
instantly into usable money. For example, some money might be in
deposits which are not easily convertible. And when the time for
usage comes, it might be tough to convert them quickly.

This way, liquidity constraints might present a problem for Sara to achieve the consumption plan .

A woman plans to retire in 40 years, and she expects to live for
30 years after that. She wants to spend 10,000 a month after she
retires. To finance her retirement she is going to invest monthly
(with her investment one month from know) over 40 years at 12.6%.
After she retires she will move her investment to a more liquid
account earning 7.2% a year. Ignore taxes and transaction costs.
How much does she have to sabe a...

Chelsea will retire in fifteen years. Once she is
retired, she will live for 20 years and need 50,000 per year to
cover her expenses (from the end of year 16 through 35). When she
retires in 15 years, she will sell her house for 800,000 and buy a
condominium for 600,000. She currently has 60,000 in savings and
the discount rate is 3%.
A) Between the end of this year and the end of year 15, how much
does...

Stefani German, a 40-year-old woman, plans to retire at age
65, and she wants to accumulate $440,000 over the next 25 years to
supplement the retirement programs that are being funded by the
federal government and her employer. She expects to earn an average
annual return of about 6% by investing in a low-risk portfolio
containing about 20% short-term securities, 30% common stock, and
50% bonds. Stefani currently has $27,960 that at an annual rate of
return of 6% will...

Jessica plans to retire on her 65th birthday. But she plans to work
part time until she turns 70. During these years of part-time work
she will neither make deposits to nor make withdrawals from her
retirement account. Exactly one year after the day she turns 70
after retiring she will begin to make annual withdrawal of $117,281
from her account until she turns 89. After this final draw she
wants $1.44 million remaining in her account. She will make...

Sara wants to have $500,000 in her savings account when she
retires. How much must she put in the account now, if the account
pays a fixed interest rate of 8%, to ensure that she has $500,000
in 20 years time.
1. $231,480
2. $180,884
3. $144,616
4.$107,274
Helen is saving to start a business. If she invests $10,000 in a
savings account now, which of the following is the minimum interest
rate required to ensure that she has $25,000...

sandra is planning for her retirement. She is 35 years old and
expects to retire in 40 years from now. She expects to live for
another 25 years after retirement. Her current anneal expenditures
are 54,000 and she expects them to increase at a rate of 3%per
year, the rate of inflation, until she retires
Upon retiring, her expenditures will be equal to her consumption
expenditure at 75. Sandra belives that she can accumulate 2m$ by
the time she retires....

A 20 year old wants to retire as a millionaire by the time she
turns 70. (With life spans increasing, and the social security fund
being depleted by baby boomers, the retirement age will have
invariably risen by the time she reaches 65 years of age, probably
to something even higher than 70, actually.) How much will she have
to save at the beginning of each month if she can earn 5%
compounded annually and have $1,000,000 by the time...

Your client is 20 years old. She wants to begin saving for
retirement, with the first payment to come one year from now. She
can save $8,000 per year, and you advise her to invest it in the
stock market, which you expect to provide an average return of 11%
in the future.
If she follows your advice, how much money will she have at 65?
Do not round intermediate calculations. Round your answer to the
nearest cent.
How much...

Martina plans to retire in 5 years. She plans to collect annual
payments of $49,100 for several years. Her first annual payment is
expected to be received in 5 years and her last annual payment is
expected in 11 years. She can earn 12.99 percent per year. How much
money does Martina expect to have in 5 years?

Bertina plans to retire in 4 years. She plans to collect annual
payments of $53,800 for several years. Her first annual payment is
expected to be received in 5 years and her last annual payment is
expected in 11 years. She can earn 10.23 percent per year. How much
money does Bertina expect to have in 4 years?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 28 minutes ago

asked 37 minutes ago

asked 48 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago