Question

Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the time he retires as $40,000 has today. (The real value of his retirement income will decline annually after he retires.) His retirement income will begin the day he retires, 10 years from today, at which time he will receive 24 additional annual payments. Annual inflation is expected to be 3%. He currently has $230,000 saved, and he expects to earn 7% annually on his savings. How much must he save during each of the next 10 years (end-of-year deposits) to meet his retirement goal? Round your answer to the nearest cent.

Answer 1

Amount to be withdrawn annually:

Annual withdrawal = 40000*(1+3%)^10 = $53,756.66

Withdrawal for 25 years.

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Now, calculate how much balance should he have in account to support 25 withdrawals:

Set financial calculator on BEGIN mode:

Using financial calculator BA II Plus - Input details:	#
I/Y = Rate =	7
PMT =	-$53,756.66
N = Number of years remaining x frequency =	25
FV = Future Value =	$0.00
CPT > PV = Present value to support 25 withdrawals =	$670,309.69

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Now, calculate how much annual payment required to achieve $670,309.69 considering the present funds of $230,000:

Set financial calculator on END mode:

Using financial calculator BA II Plus - Input details:	#
FV = Future Value = Present value to support 25 withdrawals =	-$670,309.69
PV = Present Value =	$230,000.00
I/Y = Rate / Frequency =	7
N = Number of years x frequency =	10
CPT > PMT = Payment =	$15,768.52

He has to save $15,768.52 each year and till next 10 years