Your father is 50 years old and will retire in 10 years. He expects to live for

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 $40,000 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 5%. He currently has $100,000 saved, and he expects to earn 8% 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?

Explanation / Answer

The first part is accumulated phase - you only add to saving and spend from other sources. The second phase - there will nt be any additional to saving - only interest and spending.

Spending is inflation adjusted (based on 5% inflation).

Additional also inflation adjusted - you would need to save $49,925 annualy in this year and it will be $77,450 in ten years from now.

You will have ~$1,100,000 at the time of retirement. The maximum saving will be $1,222,519 in 19 years and will start to go down because of spending increase (inflation adjusted). So far by the time your father plan to die his estate will be $54.

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