Question

You are 35 years old, and have not saved any money yet. You hope to retire at age 65, with a sustainable income of $150,000 per year of current buying power. You assume that inflation will be 3.1% and the fund you want to invest in will return 8.49% per year from now until your death.

a) What is your real rate of return? _____

b) How much money do you need in today's dollars to reach your income goal? $ _____

c) What is that amount in future actual dollars? $ _____

d) how much do you need to save each year to reach your savings goal? $ _____

Answer 1

Answer a:

Real rate of return = Nominal rate of return - Inflation rate = 8.49% - 3.1% = 5.39%

Answer b:

Money do you need in today's dollars to reach your income goal = Required sustainable income per year at current buying power / Real rate of return = $150,000 /5.39% = $2,782,931

Answer c:

Inflation rate is = 3.1%

Duration up to retirement age = 65 - 35 = 30 years

Future Value Interest Factors for One Dollar Compounded at 3.1% for 30 Periods = 2.498964

Amount in future actual dollars = $$27,82,931 * 2.498964 = $6,954,445

Answer d:

Future Value Interest Factors for a One-Dollar Annuity Compounded at 8.49% Percent for 30 Periods = 134.5144

Required saving each year to reach the savings goal = $6,954,445 / 134.5144 = $51,700