In: Finance
Assume Jacob is 30 years old and has 40 more years to work. Currently he doesn’t have any savings. His annual income in real terms is $60,000.
Assuming a life expectancy of 90 years, real interest rate throughout of 4% and desired retirement income of 70% of pre-retirement income, prepare a life time consumption-savings schedule for Jacob. Specifically calculate the following and then show excel schedule showing lifetime plan.
1-Annual savings and annual consumptions during the 40 working years
2-Accumulated wealth at the end of the working years (beginning of retirement years).
3-If Jacob plans to take a vacation at the end of his age 80 and it costs additional $10,000, and he wants to leave $15,000 for charity at the end of his life. How would these affect annual savings and consumptions? Re-prepare the schedule.
4-What will be the impact of a decrease in interest rate to 3% on the annual savings and consumptions? What about an increase in interest rate to 6%?
5-How would the financial plan change if Jacob already has savings of $20,000 today?
6-What would be Jacob’s annual savings and consumption if he wants the same standard of living during both working years and retirement years? Ignore the above question to answer this.