You have just inherited a large sum if money and you are trying to determine how

Question

You have just inherited a large sum if money and you are trying to determine how much you should save for retirement and how much you can spend now. For retirement you will deposit today(January 1, 2005) a lump sum in a bank account paying 10%compounded annually. You don't plan on touching this deposit until you retire in five years (January 1, 2010), and you plan on living for 20 additional years and then drop dead on December 31, 2029.During your retirement, you would like to receive income of $60,000per year to be received the first day of each year, with the first payment on Jaunaury 1, 2010, and the last payment in January 1,2029. Complicating this objective is your desire to have one final three-year fling, during which time you'd like to track down all the original members of the Mr Ed Show and the Monkees and get their autographs. To finance this, you want to receive $300,000 onJanuary 1, 2025, and nothing on January 1, 2026, and January 1,2027, as you will be on the road. In addition, after you passed on(January 1, 2030), you would like to have a total of $100,000 to leave to your children. a. How much must you deposit in the bank at 10% on January 1,2005, in order to achieve your goal? I UNDERSTAND THIS PART... I NEED HELP ON PART B!!!!! B. What kind of problems are associated with this analysis and its assumptions?

Explanation / Answer

Sorry for leaving part B unanswered. Well, from a mathematical standpoint, there are no problems as such. But coming to finance, I am afraid there are quite a few. The major drawback with those assumptions is you didn't the tax that you need to pay for that amount in the bank. Secondly, you can't expect the interest rates to be uniform over the next 25 years. Also, you should take inflation into account when you are planning on taking sixty thousand dollars for next 20 years. Is this ok or were you looking for flaws in the mathematical reasoning?

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