Assume you will start working as soon as you graduate from college. You plan to
ID: 2775432 • Letter: A
Question
Assume you will start working as soon as you graduate from college. You plan to start saving for your retirement on your 25th birthday and retire on your 65th birthday. After retirement, you expect to live until you are at least 85. You wish to be able to withdraw $40,000 every year from the time of your retirement until you are 85 years old (i.e., for 20 years). What is the dollar amount you need to invest every year, starting at age 26 and ending at age 65 (i.e., for 40 years), to be able to accomplish this plan if the interest rate is 10 percent?
Explanation / Answer
Answer:
The rate on your investment in 10%.
The Inflation rate is 5%.
Present value of growing perpe40tuity.
In 40 years, the amount needed will be
= 40,000 * (1.05)40 = $ 281,600
PV = 281600 / (.10 - .05) * { 1 - (1.05 / 1.10)20 )
= $ 3,379,200.00
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