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 $55,000 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 6%. He currently has $130,000 saved, and he expects to earn 10% annually on his savings. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

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

Amount needed to match purchasing power of $55,000 in 10 years (by accounting for inflation):

$55,000(1+0.06)^10= $98,496.62

Amount required 10 years later at the age of 60:

PV=$98,496.62/0.10[1-(1.10)^-25 = $894,053.82

Value of $130,000 after 10 years:

=$130,000*(1.10)^10= $337,186.52

He will need to have more savings of:

=$894,053.82-$337,186.52= $556,867.30

Amount to be saved each year for 10 years:

=$556,867.20*(-0.10)/(1-1.10^10) = $34,941.78

Therefore, he must save $34,941.78 during each of the next 10 years to meet his retirement goal.

I hope that was helpful :)