You estimate that by the time you retire in 35 years, you will have accumulated

Question

You estimate that by the time you retire in 35 years, you will have accumulated savings of $3.4 million.

a. If the interest rate is 10.5% and you live 15 years after retirement, what annual level of expenditure will those savings support? (Do not round intermediate calculations. Round your answer to 2 decimal places.

Annual expenditure  459843.21

b. Unfortunately, inflation will eat into the value of your retirement income. Assume a 5% inflation rate and work out a spending program for your $3.4 million in retirement savings that will allow you to increase your expenditure in line with inflation. What will be your expenditure amount in real terms for each year of your retirement? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Real annual expenditure ______

Can you answer the second question for me

Explanation / Answer

we wil use PV of annuity formula to find annual expenditure

PV of expenditure = annual expenditure * (1- (1+r)^(-n))/r

3400000 = annual expenditure * ( 1 - 1.105^(-15))/.105

annual expenditure = $459,843.21

b) we need to find real interest rate = 1.105/1.05 - 1 = .052381

we will use this rate in our above formula to find annual expenditure.

3400000 = annual expenditure * (1 - (1.052381)^(-15))/.052381

annual expenditure = $332856.67

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