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 $50,000 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 4%. He currently has $95,000 saved, and he expects to earn 10% 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.

Answer 1

1]	Annual retirement income required, after considering inflation = 50000*1.04^10 =	$              74,012.21
2]	Amount required at t10 for paying 25 installments [which constitute an annuity due] = PV of the 25 annual withdrawals = 74012.21*1.1*(1.1^25-1)/(0.1*1.1^25) =	$          7,38,992.97
3]	FV of the amount in hand = 95000*1.1^10 =	$          2,46,405.53
4]	Amount to be accumulated by t10 = 738992.97-246405.53 =	$          4,92,587.44
5]	The amount to be accumulated by t10 is the FV of the annual deposits to be made.
	The required annual deposits = 492587.44*0.1/(1.1^10-1) =	$              30,907.59