Question

Bill is aged 20 and starts saving $11,000 each year (growing with inflation) and invests it at a nominal rate of return of 10% per year (compounded yearly). Inflation is expected to be 3% per year. How much is he expected to have at age 60 in today's dollars (removing the effects of inflation).

Your answer should be to the nearest dollar ($ 0dp). Do not include a dollar sign in your answer.

Answer 1

What Real rate of return does is that it adjusts the inflation from nominal rate of return so that we have cash flows in today's dollars

1. Real rate of Return = [(1 + Nominal rate) / (1 + Inflation)] - 1

Real rate of Return = [(1 + 0.10) / (1 + 0.03)] - 1

Real rate of Return = 6.80%

2. Accumulated Value at the end of Year 60 = Annual investment * FVAF(0.068,40)

Accumulated Value at the end of Year 60 = $11000 * 189.4396

Accumulated Value at the end of Year 60 = $2083835

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