Question

Mike and Sheila Parker have determined that they need a retirement fund of $2,000,000 at their planned retirement in 30 years; they want to begin a savings program this year to meet this goal. They anticpate that they can earn an average7% after tax return on their retirement savings and they want to plan for 5% annual inflation. What level annual end-of-year savings amount will enable the Parkers to accumulate their targeted retirement fund?

Answer 1

		Retirement Fund required at todays dollar	$2,000,000
		Annual Inflation Rate=5%	0.05
	Nper	Number of years to retirement	30
	Fv	Retirement Fund required in actual dollar	$8,643,885	(2000000*(1.05^30)
	Rate	Average after tax return=7%	0.07
	PMT	Annual   end of year savings required	$91,507.65	(Using PMT function of excelwith Rate=0.07, Nper=30, Fv=-8643885)
		Excel Command:PMT(0.07,30,,-8643885)
		This problem can also be solved using factor formula
		Sinking Fund Factor(SFF)=(A/F,I,N)=i/(((1+i)^N)-1)
		i=Average after tax return=0.07,
		N=Number of Years=30
		SFF=(A/F, 7%, 30)=0.07/((1.07^30)-1)=	0.010586404
		Annual   end of year savings required=SFF*8643885=	$91,507.65