Question

In: Finance

. Assume that your father is now 50 years old, plans to retire in 10 years,...

. Assume that your father is now 50 years old, plans to retire in 10 years, and expects to live for
25 years after he retires—that is, until age 85. He wants his first retirement payment to have
the same purchasing power at the time he retires as $40,000 has today. He wants all of his
subsequent retirement payments to be equal to his first retirement payment. His retirement
income will begin 1 year after he retires. Inflation is expected to be 5% per year from today forward. He currently has $100,000 saved and expects to earn a return on his savings of 9% per year with annual compounding. To the nearest dollar, how much must he save during each of the next 10 years to meet his retirement goal?

Solutions

Expert Solution

Based on given data, pls find the below workings:

Current Age - Base year 50
Expected Retirement Age 60
No.of Years to Retirement 10
Life Expectancy 85
No.of Years post Retirement 25
Rate of Return during Accumulation 9.0%
Rate of Return after retirement 9.0%
Inflation Rate 5%
Inflation Adjusted Return 3.8%
Total Corpus Required:
Purchasing Power at Retirement                   40,000
No.of years after retirement 25
Inflation Adjusted Return 3.81%
Corpus required at Retirement             11,50,515
Investment so far in place                1,00,000
Rate of Return on this 9.00%
This amount at the time of Retirement               2,36,736
Net Corpus to be saved               9,13,779
Annual Savings required to reach Corpus 31,871

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