Question

Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the time he retires as $40,000 has today. (The real value of his retirement income will decline annually after he retires.) His retirement income will begin the day he retires, 10 years from today, at which time he will receive 24 additional annual payments. Annual inflation is expected to be 5%. He currently has $165,000 saved, and he expects to earn 8% annually on his savings. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

Open spreadsheet

How much must he save during each of the next 10 years (end-of-year deposits) to meet his retirement goal? Do not round your intermediate calculations. Round your answer to the nearest cent.

Answer 1

I have solved the problem in 5 simple steps.

Step1: Let us calculate the FV of fixed payments with inflation

The FV of fixed payments with inflation is $65,155.79

Step 2: Now calculate the future value of savings

The future value of savings is $427,967.51

Step 3: Now calculate the present value of the annuity

We calculated the withdrawal amount in step 1 as $65,155.79

The present value of the annuity is $650,563.88

Step 4: Let us calculate accumulated savings

Accumulated savings = Present value of annuity – Future value of savings

= $650,563.88 – $427,967.51

= $222,596.37

Accumulated savings is $222,596.37

Step 5: Finally calculate the amount of savings in the next 10 years,

So, the amount of savings in the next 10 years is $15,365.71

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