Question

You just got a new job and are faced with making retirement plans. What does this even mean? Your starting salary is $52,000 per year. You expect that will increase due to raises and inflation about 4% per year. You expect to deposit 10% of your salary into your retirement account each year. Your retirement fund has an annual interest rate of 5%. You plan to work for 39 years. (Hint: Be sure to move all values to the same point in time for equivalency.) a) How much money will be in your retirement account at the end of 39 years? (Hint: this is a geometric gradient problem) b) How much can you with draw from that account each year in retirement for 25 years. Assume you will withdraw the same amount each year. (Hint: this is a uniform annuity problem)

Answer 1

1: this implies that the person needs to plan his retirement expenses in such a manner that he is able to set aside sufficient money to be able to meet his own and family expenses post retirement.

2: Fv of growing annuity = First payment*((1+r)^n-(1+g)^n))/(r-g)

= 5200*((1+5%)^39-(1+4%)^39)/(5%-4%))

=1085960

Hence the amount in the retirement account at the end of 39 years=1085960

3 : using a financial calculator input

PV =- 1085960

N = 25

I/Y = 5

Solve for PMT as 77,051.55

Hence he can withdraw an amount of $77,051.55 each year in retirement