In: Finance
Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with retirement income of $28,000 per month for 20 years, with the first payment received 30 years and 1 month from now. Second, he would like to purchase a cabin in Rivendell in 20 years at an estimated cost of $1,149,000. Third, after he passes on at the end of the 20 years of withdrawals, he would like to leave an inheritance of $550,000 to his nephew Frodo. He can afford to save $2,000 per month for the next 20 years.
If he can earn a 10 percent EAR before he retires and a 7 percent EAR after he retires, how much will he have to save each month in Years 21 through 30?
=-PMT((1+10%)^(1/12)-1,12*10,0,PV((1+7%)^(1/12)-1,12*20,-28000,-550000)+FV((1+10%)^(1/12)-1,12*30,0,PV((1+10%)^(1/12)-1,12*20,-2000,1149000)))
=15354.3463