Question

You are 30 years old. You expect to retire at the age of 65.

Your income pre-retirement: $35000/a year

expense pre-retirement: $20000/a year

Your income post-retirement: $10000/a year

expense post-retirement: $12000/a year

a)  How much “replacement income” does your household require each month you are retired? (“Replacement Income required” = Total monthly expenses – income currently available (Rental income, dividends, social insurance. “Replacement Income required” is your monthly budget deficit.)                                                                                              

b)        Using the amount of replacement income you determined your household requires monthly to meet your monthly expenses, calculate the amount of funds you must have accumulated (SAVED and INVESTED) by your 65^th birthday to FUND (pay for) your retirement until you are 90 years of age. Monthly retirement income must begin ON your 65^th birthday.

            *Use a 4.50% annual rate of return (compounded monthly) as your Opportunity Cost to calculate this amount.     

Answers don't have to be specific number, please show me the correct calculations. Thanks in advance!

Answer 1

Please find as below short fall of the amount post retirement required is 10000 - 12000 = 2000 $

A } Annual rate of return = 4.5 %

Terefore, in order to cover the short fall of amount of 2000 after retirement we require

2000 / 4.5 % = 44,444 /- to be invested now.

B } to be invseted in the year of retirement

therefore to start to save from 30th year till 65 th year = 44,444 / 36 years = 1234.5 $ each year

So, by saving the above amount the short fall of 2000 $ after retirement you will be able to cove the deficit of the 2000 $ required after retirement.