Question

Your cousin Joe at age 25 wants to plan for his retirement and estimates to retire at the age of 65. He already has $5000 in his savings that he received as a gift from his mother. He plans to save some of his income each year during his working years and he plans to increase his savings at a constant 5% each year.

He wants to be able to spend $100.000 for 20 years after his retirement and at the end he wants $300.000 savings to donate his favorite charity. Retirement spending must increase and cover 2% annual inflation as well.

He expects to make 5% return on his savings during working years and 4% after retirement.

Assume cash flows occur at the end of the year.

Calculate the saving amount in the first year of working for Joe.

Please solve in Excel

Answer 1

Ley me walk you through the problem. Joe at age of 25 had $5000 so all that money would be invested at age of 25 and thus it would be compounded annualy at 5% so it would be compounded for next 40 years. The next amount which he would be invested was initially assumed to be 5% higher than the $5000 but the final amount was bit lower. Now he invests $ 5276.52 at the end of age of 25 thus the amount will be compounded for first time at completion of age 26. Now you put formula as I kept and model would be ready and you can change variables too. The answer is $5276.52