Question

Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the time he retires as $60,000 has today. (The real value of his retirement income will decline annually after he retires.) His retirement income will begin the day he retires, 10 years from today, at which time he will receive 24 additional annual payments. Annual inflation is expected to be 4%. He currently has $185,000 saved, and he expects to earn 10% annually on his savings. How much must he save during each of the next 10 years (end-of-year deposits) to meet his retirement goal? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

First, we need to figure out his annual retirement income after accounting for inflation:

$60,000 x 1.04¹⁰ = $88,814.66

This amount is to be withdrawn annually, at the beginning of the year, for 25 years. So, when he turns 65 he will need to have the following balance in his account.

Switch to BEGIN mode….

N = 25; I/Y = 10; PMT = -65,155.79; FV = 0;

CPT PV = 806,174.20

Given an initial deposit of $185,000, how much will he have to save each year to have saved 806,174.20 in 10 years?

Switch to END mode…

N = 10; I/Y = 10; PV = -185,000 FV = 806,174.20;

CPT PMT = -20,475.82