Question

Bodie Bonds is making his retirement plans. He currently has savings of $125,000. He hopes to retire in 15 years. His retirement expenses are expected to be $60,000 during the first year of retirement; Bodie expects these expenses to grow by 2% a year to keep up with inflation. Bodie wishes to provide for 30 years of retirement. Assume that all cash flows arise at year end (not year beginning) and that the rate of return (interest rate or discount rate) is 6%.

Question	Answer
What is the amount required in the retirement fund on the day Bodie retires? [Hint: calculate PV of expenses, the form of this stream of expenses is that of a growing annuity]
What is the amount of savings required each year during Bodie’s working life (assume that each year’s savings is the same)?

[Please show your work on this page.]

Answer 1

Question	Answer
What is the amount required in the retirement fund on the day Bodie retires? [Hint: calculate PV of expenses, the form of this stream of expenses is that of a growing annuity]	1026935.40
What is the amount of savings required each year during Bodie’s working life (assume that each year’s savings is the same)?	$31,249.64

Workings

PV of annuity with growth = (P/ (r-g)) * (1- ((1+g)/(1+r))^n)