Question

You have just graduated and found a job, so making investment plans for retirement.

You estimate the following parameters, desired plans and constraints:

Years 0-4 won’t save anything.

Years 5-15 will save $5000/yr (don’t adjust this one for inflation)

Year 10 purchase boat for $20,000 in today’s $s; estimate inflation 2%.

Plan for kids’ college: assume 10,000/yr, in today’s $s; estimate inflation 3.5%. Plan on 3 years, starting in year 20. (ea pymt at beginning of year; adjust 1^st year’s payment for inflation, but then use that for each of 3 years)

Retirement beginning end of year 40; plan on 30 years. Want $50,000/year in today’s $s, inflation 2%. (after finding 1^st year’s retirement amount, don’t adjust further for inflation)

Market interest rate years 0-15 8%; years 16-40 6%; retirement 4%

How much will you need to save annually during years 16-40?

As above, don’t further adjust for inflation.

For all of the above, if not told otherwise, assume payments interest changes occur at end of year.

Advanced question to think about; what would you have to do to adjust for inflation throughout?

Answer 1

		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate
		N=Year of Cash Flow
		i=8% =0.08 for year 1-15
		i=6%=0.06 for year 16-40
		i=4%=0.04 for year 41-70
		Nominal price of boat at end of 10years(actual dollars)
		20000*((1+0.02)^10)=	$24,380
		Cost of kids education (actual dollars)
		Per year cost=10000*((1+0.035)^19)	$19,225
		PRESENT VALUE OF COSTS AT END Of YEAR 15
		N	A	B=A/(1.06^N)
	Years from 0	Years from year15	Cost of education	Present Value in Year 15
	16	1
	17	2
	18	3
	19	4	$19,225	$15,228
	20	5	$19,225	$14,366
	21	6	$19,225	$13,553
			Total	$43,147
		Present value ofCash Flow at end of Year 15	-$43,147
		CASH FLOW FROM YEAR 0-15
		Discount Rate=8%=0.08
		N	A	B	C	D=A+B+C	E=D/(1.08^N)
		Year	Annual Savings	Purchase Boat	Kids Education	Net Cash Flow	Present value
		0				$0	$0
		1				$0	$0
		2				$0	$0
		3				$0	$0
		4				$0	$0
		5	$5,000			$5,000	$3,403
		6	$5,000			$5,000	$3,151
		7	$5,000			$5,000	$2,917
		8	$5,000			$5,000	$2,701
		9	$5,000			$5,000	$2,501
		10	$5,000	-$24,380		($19,380)	($8,977)
		11	$5,000			$5,000	$2,144
		12	$5,000			$5,000	$1,986
		13	$5,000			$5,000	$1,838
		14	$5,000			$5,000	$1,702
		15	$5,000		-$43,147	($38,147)	($12,026)
						SUM	$1,342
		Net Present Worth of Savings from Year1-15	$1,342
		(After taking care of expenses on Boat and Kid's Education)