Question

In: Finance

Victor is spending HKD300,000 per year and is quite satisfied with the present living lifestyle and...

Victor is spending HKD300,000 per year and is quite satisfied with the present living lifestyle and standard. He is now 38 and plans to retire at age 60. He believes he can live up to age 85. He wants to keep 80% of the current living lifestyle and standard after retirement. Victor would like all the money for retirement to be ready when he retires. He also would like the retirement money for spending in a year to be ready at the beginning of every year. He plans to start saving for the retirement reserve with an equity unit trust fund of 10% annual rate of return. Average expected annual rate of return during his retirement period is 6%. Assume the average long term inflation is 4% p.a.

a. What is the required annual expenditure at the time when Victor retires at age 60?

b. What is the total amount of money required for 25 years after Victor’s retirement? (at the beginning of age 60)

c. How much should Victor save at the beginning of each month from now on until the age of 60 in order to meet the required amount at (c)?

Solutions

Expert Solution

Real rate of return before retirement= nominal return-inflation rate=10%-4%=6%

Real rate of return after retirement=6%-4%=2%

After retirement his yearly spending in today's dollar term (PMT)=300000*80%=240000 HKD, return rate=2%, nper=80-60=25, PV=?

a. Hence, required annual expenditure when Victor retires= 240000*(1+4%)^(60-38)=$568780.5

b. After retirement his yearly spending in today's dollar term (PMT)=300000*80%=240000 HKD, return rate=2%, nper=80-60=25, PV=?

Hence, total money required at the age of 60 for Victor's retirement= 4685629.55*(1+4%)^(60-38)=$11104561.52

c.

Now, before retirement total money (FV)=$11104561.52, monthly rate=10%/12=0.833%, nper=12*(60-38)=264, PMT=?

Hence, Victor needs to save 11553.81 HKD at the beginning of each month to meet his retirement goal.


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