Question

Chapter 5

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 $35,000 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 4%. He currently has $85,000 saved, and he expects to earn 9% 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? Do not round your intermediate calculations. Round your answer to the nearest cent.

Answer 1

The annual Inflation is 4.00%. The Purchasing power as on date is USD35000. The purchasing power after ten years, considering the inflation rate of 4.00% (compounding) is USD51808.55. The annual saving is USD 85000 and the annual rate of saving 9.00% (Compounding) is 201225.90. The present value future annuity of USD 51808.55 for 24 period is USD 554694. Therefore the net saving amount should be USD353468.10 (554694-201225.90). The yearly saving should be USD21344.31. The Compounding rate consider is 9.00%.

Theerefore the correct answer is USD21344.31