Question

In: Finance

Assume Jacob is 30 years old and has 40 more years to work. Currently he doesn’t...

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.

Solutions

Expert Solution

1,2

3)

4)

5)

6)


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