Your 64 year old friend is planning to retire one year from today. He estimates
ID: 2744108 • Letter: Y
Question
Your 64 year old friend is planning to retire one year from today. He estimates his current expenses (in 2016 constant dollars) are $ 35,000/year. You estimate inflation on his expenses will be fixed at 3%/year. Your friend will also start to collect Social Security payments one year from today. He estimates the payments will be (in 2016 constant dollars) $25,000/year. These are adjusted for inflation at a rate of 2% per year. Your friend has a savings account that yields a market interest rate of 6%/year.
How much money does he need to have in the account today to guarantee covering his expenses for 30 years considering he will get Social Security payments during those same 30 years?
Hint: Use constant dollars, with the appropriate interest rates.
Explanation / Answer
Year Expenses(Increased 3% every year) Inflows from Social Security(Increased 2% every year) Deficiency DF @ 6% PV 1 30900 25500 5400 0.943396 5094 2 31827 26010 5817 0.889996 5177 3 32782 26530 6252 0.839619 5249 4 33765 27061 6704 0.792094 5311 5 34778 27602 7176 0.747258 5362 6 35822 28154 7668 0.704961 5405 7 36896 28717 8179 0.665057 5440 8 38003 29291 8712 0.627412 5466 9 39143 29877 9266 0.591898 5484 10 40317 30475 9843 0.558395 5496 11 41527 31084 10443 0.526788 5501 12 42773 31706 11067 0.496969 5500 13 44056 32340 11716 0.468839 5493 14 45378 32987 12391 0.442301 5480 15 46739 33647 13092 0.417265 5463 16 48141 34320 13822 0.393646 5441 17 49585 35006 14579 0.371364 5414 18 51073 35706 15367 0.350344 5384 19 52605 36420 16185 0.330513 5349 20 54183 37149 17035 0.311805 5311 21 55809 37892 17917 0.294155 5270 22 57483 38649 18834 0.277505 5226 23 59208 39422 19785 0.261797 5180 24 60984 40211 20773 0.246979 5130 25 62813 41015 21798 0.232999 5079 26 64698 41835 22862 0.21981 5025 27 66639 42672 23967 0.207368 4970 28 68638 43526 25112 0.19563 4913 29 70697 44396 26301 0.184557 4854 30 72818 45284 27534 0.17411 4794 TOTAL PV 158263 Amount required today is $ 1,58,263
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