Question

If you want to spend $75,000 per year in todays purchasing power, how much money would that require in the middle of retirement (retirement start 2037, middle of retirement is 2052)? Please show work so I can follow the solution.

Answer 1

Given that at present you are incurring an expense of 75000$ per year

Then in future to meet the same expeses you need more money beacuse purchasing power depends on inflation

So assuming that the rate of inflation per year is 2%

so this indicates that every year there will be increase in the expenses by 2% so

By using future value concept

Future value= present value *(1+r)^n so assuming r= 2% and n is 1 year

so current year = 2020 next year is 2021 so for 2020 we are incurring 75000$ per year

for 2021 we need= 75000(1+2%)^1=75600$

but we need the money required at the mid of the retirement i.e in 2052 . so from now, after (2052-2020)=32 years (n)

=75000*(1+2)^32 = 141340$ per year in 2052.