Question

In: Finance

34. Suppose you are fresh out of college and plan to immediately start working and retire...

34. Suppose you are fresh out of college and plan to immediately start working and retire in 40 years, after which you plan to live for another 20 years after retirement. Assuming that the interest rate from now until the end of retirement will average about 5% and that your income before retirement will likely be about $80,000 per year, how much should you save annually between now and retirement:

a. If you want to replace about 75% of your pre-retirement income after retirement?

b. If you want to spend the same amount of money after retirement as you did before retirement?

c.The present value of one’s future labor income is called_____.

Solutions

Expert Solution

1- present value of sum required to get 60000 for next 20 Years annuity value*PVAF at 5% for 20 Years 60000*12.4622 747732
value of Income after retirement 75% of 80000 60000
PVAF at 5% for 20 Years 1-(1+r)^-n /r 1-(1.05)^-20 /5% .623110/5% 12.4622
How much you save annualy Future value at the time of retirement/FVAF at 5% for 40 Years 747732/120.798 6189.94
Future value of Investment at the time of retirement 75% of 80000 747732
FVAF at 5% for 40 Years (1+r)^n -1 /r 1.05^40 -1 / 5% 6.0399/5% 120.798
2- present value of sum required to get 80000 for next 20 Years annuity value*PVAF at 5% for 20 Years 80000*12.4622 996976
value of Income after retirement 80000
PVAF at 5% for 20 Years 1-(1+r)^-n /r 1-(1.05)^-20 /5% .623110/5% 12.4622
How much you save annualy Future value at the time of retirement/FVAF at 5% for 40 Years 996976/120.798 8253.25
Future value of Investment at the time of retirement 75% of 80000 996976
FVAF at 5% for 40 Years (1+r)^n -1 /r 1.05^40 -1 / 5% 6.0399/5% 120.798
3- sum of present value of future income or cash flow

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