You are 25 and plan to retire in 40 years at age 65 with an inflation rate of 3.

Question

You are 25 and plan to retire in 40 years at age 65 with an inflation rate of 3.22%. Answer the following questions.

a. What amount the year you retire would be equivalent to $30,000 in today’s dollars? (round to a whole number).

b. If you want that amount each year adjusted for inflation and you did not want to erode your principle, how much would you need as a lump sum when you retire? Assume a 8% return on money.

c. How much would you need to save each month for the next 40 years, to get the amount you found in above (assume 8% return)?

Explanation / Answer

a) Todays dollars(PV) = $30,000

Annual Inflation = 3.22%

Time to retirement = 40 years

Equivalent Retirement amount at age 65 = 30,000*(1+3.22%)^40 = $106,580

b) Assuming that the life span is till 85 ie 20 years post retirement

Income required at retirement (PMT) = 106,580

Inflation rate = 3.22%

Rate of return = 8%

Inflation adjusted rate of return(rate) = (1+8%)/(1+3.22%) -1 = 4.63%

Reirement Corpus = PV( 4.63%,20,106,580) = $1,370,900

c)

Future Value = 1,370,900

nper= 40 years*12 = 480 Months

Rate = 8%/12

Amount to be saved each month = $ 9532

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