Question

You believe you will need $1.75 million to live comfortably while retired. You are 35 and plan on retiring when you are 65 and will begin withdrawing funds from your retirement account on your 66^th birthday. You expect to need 25 years of retirement income. Calculate the amount you must invest annually in real dollars to meet your retirement goal. Assume 7% is the fair nominal rate and inflation is 3% per year (the real rate is 3.89%).

Answer 1

Here we need assumption.

Assuming 1.75m is the total fund needed then I will need 1.75m at the end of 65 years. So I will have to invest for the next 30 years. So per year contribution is 31780 (computed on financial calculator. n=30. i/y=3.89 and FV=1750000)

Assuming 1.75 is required per year for 25 years after retirement, then funds required at retirement is 28.33m (doing pv of 1.75 for 25 years). So per year contribution is 1.10m (calculated on a financial calculator)