In: Finance

Tommy plans to retire in 25 years (1st withdrawal in year 26).
He is told by Simon that a desirable standard of living in 26 years
will require $180,249 per year. Tommy wants to be able to maintain
that level of purchasing power forever (Assume *inflation = 3%
per year*). Tommy plans to *increase his savings by 2% per
year* and expects to earn 6% per year on his investments.

How much does Tommy have to **save the first year**
to fund his retirement goal?

**Step 1 : Calculate Retirement Corpus**

To calculate the corpus reqired at the time of retirement, we need to use the PV function of excel:

- Retirement Period =
**20 Years**(Lets assume he'll live 20 years after retirement, ie, from 60 years to 80 years) - Effective rate of return =
**2.91%**

Retirement Corpur Required = **$2,782,790**

**Step 2 : Calculation of First Year
Investment**

- Saving period =
**25 years** - Goal Required =
**$2,782,790** - Rate of Return = (1+6%)*(1+2%)-1 =
**8.12%**

This can be solved using the PMT function excel:

Hence, the first year investment needs to be
**$34,594,** which will increased by 2% every year to
reach the goal.

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