Question

One of your clients is planning to retire at the age of 70, and expects to live for another 15 years in retirement. He has calculated that to be able to do the things he enjoys, he will need $5,000 a month of cash flow as he begins retirement, with a 3% annual inflation adjustment each year. He just celebrated his 30th birthday, and he would like to begin saving an equal amount from his monthly paycheck until he retires. If the long term average annual return from the market is 8%, how much must his client save every month to achieve his retirement goal? Please show the crucial solution steps in arriving at your answer

Answer 1

		Amount needed at the time of retirement:
		Annual return from the market	8%	0.08
		Inflation rate	3%	0.03
		Inflation adjusted return =((1+0.08)/(1+0.03))-1	0.048543689
		Inflation adjusted monthly return =r
		(1+r)^12=1.048544
		1+r=1.048544^(1/12)=	1.003957999
	Rate	Inflation adjusted monthly return =r	0.003957999
	Nper	Number of months in retirement=15*12	180
	Pmt	Monthly cash required in real terms(Inflation adjusted)	$5,000
	PV	Amount needed at the time of retirement:	$642,830
		(Using excel PV function)
		Savings Required Every Month:
	Rate	Monthly Return =(1.08^(1/12))-1=	0.00643403
	Nper	Number of months of saving=(70-30)*12	480
	Fv	Amount needed at the time of retirement:	$642,830
	PMT	Savings Required Every Month:	$199.57
		(Using PMT function of excel)