Question

Assume you are 40 years old and wish to retire at age 65. You expect to be able to average a 6% annual rate of interest on your savings over your lifetime (both prior to and after retirement). You would like to save enough money to provide $8,000 per year beginning at age 66 in retirement income to supplement other sources (Social Security, pension plans, etc.) Suppose you decide to that the extra income needs to be provided for only 15 years (up to age 80). Assume that your first contribution will take place one year from now.

1.How much must you save each year between now and retirement to achieve your goal?

2. If the rate of inflation turns out to be 6% per year between now and retirement, how much will your first $8,000 withdrawal be worth in today's purchasing power?

Please show your work.

Answer 1

1.

You Expect to live for 15 year after retirement. So total amount require at time of retirement is calculated in excel and screen shot provided below:

So total amount require at time of retirement is $82,359.87.

You have 25 year remains in retirement. So annual saving required to accumulate $82,359.87 in 25 year is calculated in excel and screen shot provided below:

You Require to save $1,501.15 per year for next 25 year.

2.

Inflation rate = 6%

Value of annual withdrawal in today's purchasing power = $8,000 × (1 + 6%) ^ 25

= $8,000 × 4.2918

= $34,334.97

Value of annual withdrawal in today's purchasing power is $34,334.97.