Question

Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the time he retires as $40,000 has today. (The real value of his retirement income will decline annually after he retires.) His retirement income will begin the day he retires, 10 years from today, at which time he will receive 24 additional annual payments. Annual inflation is expected to be 3%. He currently has $230,000 saved, and he expects to earn 7% annually on his savings. How much must he save during each of the next 10 years (end-of-year deposits) to meet his retirement goal? Round your answer to the nearest cent.

Answer 1

Solution:

Determining how much he will save during each of the Next 10 Years to meet his Retirement Goal:

The first step is to calculate the annual retirement income after accounting for inflation:

The above calculated amount has to been drawn in the beginning of the year, for 25. Thus, when he is at the age of 65 he has the following balance in his account,

Switch to BEGIN mode….

N = 25

I/Y = 7

PMT = -$53,756.66

FV = 0

CPT PV = $670,309.75

Therefore, the Savings during each of the Next 10 Years to meet his Retirement Goal is $670,309.75.