Professor Slezak wants to start saving for his retirement, which will start in 1

ID: 2715217 • Letter: P

Question

Professor Slezak wants to start saving for his retirement, which will start in 15 years. He currently has no savings since he has been enjoying life and had to put two daughters through college (at out-of-state universities). He expects to live for 20 years after he retires (based on a forecast of longevity given his family's medical history and trends in medical advances). He would like to have $10,000 per month and retire to a $1,000,000 home in the Pacific Northwest of the United States. Assume he can get an effective annual rate of 5% (r = 0.05) while he is savings, but will want his savings to be safe, only earning an effective annual rate of 2% (r = 0.02) during retirement.

How much does Slezak need to save per month over the next 15 years?

Explanation / Answer

Calculation of amount that Slezak need to save per month over the next 15 years:

Monthly expense during the retirement

10000

Number of months in retirement period (20 years *12)

240

Monthly Return to be earned during retirement period = 2%/12

0.16667%

Present value factor (0.16667%, 240)

197.67403

Value of monthly expense as on the date of retirement = 10000*197.67403

$1,976,740.35

Add: Amount required for home as on the date of requirement

$ 1,000,000.00

Total Value of required funds as on the date of retirement

$2,976,740.35

Period before retirement (Months) = 15 years *12

180

Interest rate before retirement (Monthly) = 5%/12

0.41667%

Present value factor (0.41667%, 180)

267.28894

Monthly Saving Required = 2976740.35 / 267.28894

$11,136.79