Today is your 30th birthday and you plan to retire in 30 years when you are...

Today is your 30th birthday and you plan to retire in 30 years when you are 60. You expect to need $75,000 a year in retirement (the first $75,000 will be paid on your 61st birthday) and expect to live to be 95. If you assume you can earn a nominal rate of 5.5% on your investments calculate the amount you will need to save each year until you retire if you start saving next year on your 31st birthday. Solve in Nominal terms.

Expert Solution

First, we calculate the amount required at retirement to enable the yearly withdrawals during retirement. The amount required at retirement is calculated using PV function in Excel :

rate = 5.5% (rate of return earned)

nper = 35 (number of years in retirement)

pmt = -75000 (yearly withdrawal. This is entered with a negative sign because it is a withdrawal)

PV is calculated to be $1,154,291.41

Next, we calculate the yearly saving required to accumulate the required amount at retirement. The yearly saving required is calculated using PMT function in Excel :

rate = 5.5% (rate of return earned)

nper = 30 (number of years until retirement)

pv = 0 (amount currently saved is zero)

fv = 1154291.41 (required amount at retirement)

PMT is calculated to be $15,935.44

Amount you will need to save each year is $15,935.44

jeff jeffy answered 2 years ago

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