Question

In: Finance

You start a new job at age 39 with a beginning salary of $72,000 per year...

You start a new job at age 39 with a beginning salary of $72,000 per year paid monthly. You expect a 2% increase annually in your salary. You invest 10% of your salary and your employer gives you an additional 3% of your salary each year paid into your retirement account monthly. At the end of year 6 you get a $10,000 raise instead of the 2% increase. At the end of year 10 you get another $10,000 raise instead of the 2% increase. The investment firm that you have your retirement account with is averaging 10% gains on your money over your lifetime. You expect to live until you are 95 years old and would like to retire by the time you are 65.

If you retire when you have $1,000,000 How long will it last if you need $4000 per month to live on?

Solutions

Expert Solution

Basically we need to focus on answering this question that If you retire when you have $1,000,000 How long will it last if you need $4000 per month to live on.

So first we need to calculate tha with the given information, at what age will I be able to accumulate $1,000,000

If he stars with 72000 p.m. salary, his annual salary in the first year would be 72000*12 = 864000 and following would be his salary scedule till the age of 65:

Now we need to find the investment schedule for these total savings.

Here, opening balacne for any year is the closing balance of the previous year

Interest= 0.10*opening balance

Closing balance = opening balance+interest+addtional investment

So by the end of 7 th year, he would cross 1000000 mark

Now if he retires when he has 1000000 and draws 4000 every month till he can completely finish off his savings, we can calculate the number of year using the following formula:

We wont get a decisive value for n because the rate at which the funds will gain interest is higher than the rate at which the payment of 4000 is withdrawn per month.


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