You are 30 years old today and planning to retire at age 62. You want to plan yo
ID: 2771983 • Letter: Y
Question
You are 30 years old today and planning to retire at age 62. You want to plan your finances for living 35 years past age 62 and die dead broke. You determine you will need $3000 per month from age 62 for the 35 years.
Your plan is to go live in the tropics, on the beach, and live on coconuts and fishing. Also, you need to conclude your retirement savings at age 55 because all your spare money then will be going to your children’s education.
The question is how much money you will need to save each month between now and 55 so that you can quit contributing. The expected return on your investments over the whole period is 10% per year. Please ignore inflation.
Explanation / Answer
USING FINANCIAL CALCULATOR/ EXCEL,
Amount of desired withdrawals (PV) =
PMT = -3,000; I/Y = 10%; N = 35YRS
(Financial Calculator should be on Beg Mode or PV should be calculated for 34 YRS and 3,000$ should be added.)
Therefore PV = 31,826$ AT THE END OF 62 YEARS
Thus PV at end of 55 Years = 31,286/(1.10)7 = 16,055$
The annuity payment to be made till the age of 55 years is as follows,
N=25 YRS, I/Y = 10%, FV= -16,055;
Therefore PMT = 163.25$ PER YEAR
THEREFORE MONTHLY SAVINGS = 163.25/12 = 13.6$
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