Bill is 30 years old man earning $80,000 per year. He expects to work till age...

Bill is 30 years old man earning $80,000 per year. He expects to work till age 65. He desires to have retirement income equal to 80% of pre-retirement income. He plans on 25 years of retirement life. He plans to spend extra $15,000 for vacation during year 70 and leave $25,000 for charity at the end. Assume interest rate is 6%. How much should he save per year during his working years to achieve his plan? If interest rate decreases, will he need to save more or less? Explain.

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Expert Solution

If the interest rate decreases, then Bill will have to save more to cover the expenses in retirement. This is because a smaller interest rate when compounded gives a smaller amount at retirement. The PV of retirement goal will be larger too as the smaller interest rates cause smaller discounting effect.

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jeff jeffy answered 1 year ago

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