In: Finance

# Tommy plans to retire in 25 years (1st withdrawal in year 26). He is told by...

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? ## Solutions ##### Expert Solution 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.

## Related Solutions

##### Chad Zutter, a 25 years old university graduate, and he wishes to retire at age of...
Chad Zutter, a 25 years old university graduate, and he wishes to retire at age of 65. To cover his cost of living after retiring, he deposits \$2,000 each year into retirement fund. He will earn 10 percent over the fund until he retires. * (a) If Chad makes an annual end of year payment, how much will he has when he retired. (b) If Chad decided to start saving beginning of the year, calculate the amount he will has...
##### Peter intends to retire in 25 years time. he decides to save 500 at the start...
Peter intends to retire in 25 years time. he decides to save 500 at the start of each month until he retires. The pension fund is offering him a rate of 5.2% AER. (A) (i) Find the rate of interest compounded monthly that would be equivalent to an AER of 5.2%, correct to 6 significant figures. (ii) What lump sum will peter receive on his retirement? (B) Peter uses his retirement fund to purchase an annuity at 4.2% AER. This...