Question

Using the information below, answer the following questions:

Annual Retirement Income Need	150,000
Years until Retirement	30
Years in Retirement	35
Expected Inflation Rate	2.50%
Rate of Return before Retirement	8.00%
Rate of Return during Retirement	5.00%

1. Using equation 8-10 from the book, how much money will you need to have accumulated at the time of retirement to be able to meet your income needs during retirement?
2. If you were to make a single lump sum investment today, how much would you need to invest to meet your goal at the time of retirement?
3. If you were to invest an equal dollar amount each year, how much would you need to invest annually to meet your goal at the time of retirement?

Please show steps in the EXCEL!!!!

Answer 1

Real rate of return=(1+nominal)/(1+inflation)-1

Before retirement:1.08/1.025-1=.0537 or 5.37%

After retirement:1.05/1.025=.0244 or 2.44%

Present value=23.3567*150000

PV=3503505

b) Investment to be made today=3503505/(1.0537^{^30})

=729446.32

c)3503505 is the future value of annuity to be invested each year

Formula:

FV of annuity= FV factor for 30 years at 5.37% * Annuity

Annuity=FV of annuity/FV factor

Annuity=3503505/70.8187

Annuity=49471.47

Hence every year he should invest 49471.47