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 years old. 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, after which time he will receive 24 additional annual payments. Annual inflation is expected to be 4.5%. He currently has $115,000 saved, and he expects to earn 7.2% 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

amount required at end of 10 years PMT 40000 no of period 24 rate 4.50% PV $579,819.13 annual savings required FV 579819.13 rate 7.20% no of period 10 PMT $41,571.08 Thus he needs to save 41571.08 each year till 10 years

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