Suppose that you wish to save enough to fund $4,500 per month (in today's purchasing power)...

Suppose that you wish to save enough to fund $4,500 per month (in today's purchasing power) for 30 years of retirement. The fund you invest in during your working (or saving) years is expected to earn interest at 6% AR. At retirement, you will move your retirement funds into a less risky investment earning 4% AR. If you are 35 years from retirement, find the level of monthly savings (in current dollars) that will be required.

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Expert Solution


	Assuming Annual inflation =2%
	Monthly amount required on retirement(actual dollar)
	$4500*(1+0.02)^35=	$9,000
	Inflation adjusted return during retirement	2%	(4-2)
Rate	Inflation adjusted monthly return =(2/12)%=	0.1667%
Nper	Number of Months in retirement	360	(30*12)
Pmt	Monthly amount required	$9,000
PV	Retirement Fund Required at retirement	$2,434,802	(Using PV function of excel with Rate=0.1667%,Nper=360,Pmt=-9000)
	MONTHLY SAVINGS REQUIRED
Rate	Interest rate during savings=(6/12)%	0.50%
Nper	Number of months of savings	420	(35*12)
FV	Future Value required at retirement	$2,434,802
PMT	Monthly savings required in actual dollars	$1,709	(Using PMT function of excel with Rate=0.5%,Nper=420,Fv=-2434802)

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