Ichabod Kazels is 45 years old and makes $55,000 per year. He plans on working u
ID: 2743018 • Letter: I
Question
Ichabod Kazels is 45 years old and makes $55,000 per year. He plans on working until age 70. At that point he wants to retire and move to St. Lucia in the Caribbean; see
In fact, he wants to be able to afford a house like the one featured in the following link:
That is, he will want to buy a house for $2,900,000.00. (Ignore inflation.)
Since the cost of living is fairly low (although nice housing is relatively expensive) in St. Lucia, he thinks that he will need only approximately $8000 per month to cover living expenses (food, taxes, gas, entertainment, etc…) in excess of the cost of the house.
When he dies, he wants to bequest the whole house to his twin children Ingrid and Ingmar free and clear. Thus, he does not want to have to borrow against the house to fund living expenses.
Unfortunately, he has not been saving very much up to this point; he only has $50,000 in savings now. Since he is risk averse, he has invested in low-risk securities that he expects to earn an effective annual rate of 3 percent per year.
He intends to work until he is 70. Both of his parents and their parents lived well into their mid 90s. So, he expects to live until 95. He expects to be very risk averse in retirement and will seek safe investments that generate only an effective annual rate of 2%.
How much does he need to save per month in order to afford the house and living expenses in retirement? Can he afford such a dream?
What if he goes for a more reasonable house such as that in the link below (for $290,000).
How much does he need to save per month in order to afford the first house if he invests in riskier securities that earn an expected effective annual rate of 9 percent? Can he afford it then?
Explanation / Answer
If he goes for cheaper house.
If security pays him 9%, then
Age Amount at the beginning Amount bought Interest Total 45 50000 33581.7305 1500 85081.73 46 85081.7305 33581.7305 2552.452 121215.9 47 121215.9129 33581.7305 3636.477 158434.1 48 158434.1208 33581.7305 4753.024 196768.9 49 196768.8749 33581.7305 5903.066 236253.7 50 236253.6717 33581.7305 7087.61 276923 51 276923.0123 33581.7305 8307.69 318812.4 52 318812.4332 33581.7305 9564.373 361958.5 53 361958.5367 33581.7305 10858.76 406399 54 406399.0233 33581.7305 12191.97 452172.7 55 452172.7245 33581.7305 13565.18 499319.6 56 499319.6367 33581.7305 14979.59 547881 57 547880.9563 33581.7305 16436.43 597899.1 58 597899.1155 33581.7305 17936.97 649417.8 59 649417.8195 33581.7305 19482.53 702482.1 60 702482.0845 33581.7305 21074.46 757138.3 61 757138.2776 33581.7305 22714.15 813434.2 62 813434.1564 33581.7305 24403.02 871418.9 63 871418.9116 33581.7305 26142.57 931143.2 64 931143.2094 33581.7305 27934.3 992659.2 65 992659.2362 33581.7305 29779.78 1056021 66 1056020.744 33581.7305 31680.62 1121283 67 1121283.097 33581.7305 33638.49 1188503 68 1188503.32 33581.7305 35655.1 1257740 69 1257740.15 33581.7305 37732.2 1329054 70 1329054.085 33581.7305 39871.62 1402507 71 1402507.438 33581.7305 28050.15 1464139 72 1464139.317 33581.7305 29282.79 1527004 73 1527003.834 33581.7305 30540.08 1591126 74 1591125.641 33581.7305 31822.51 1656530 75 1656529.885 33581.7305 33130.6 1723242 76 1723242.213 33581.7305 34464.84 1791289 77 1791288.788 33581.7305 35825.78 1860696 78 1860696.294 33581.7305 37213.93 1931492 79 1931491.95 33581.7305 38629.84 2003704 80 2003703.52 33581.7305 40074.07 2077359 81 2077359.321 33581.7305 41547.19 2152488 82 2152488.238 33581.7305 43049.76 2229120 83 2229119.733 33581.7305 44582.39 2307284 84 2307283.858 33581.7305 46145.68 2387011 85 2387011.266 33581.7305 47740.23 2468333 86 2468333.222 33581.7305 49366.66 2551282 87 2551281.617 33581.7305 51025.63 2635889 88 2635888.979 33581.7305 52717.78 2722188 89 2722188.489 33581.7305 54443.77 2810214 90 2810213.99 33581.7305 56204.28 2900000Related Questions
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