Question

1. 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:
   1. If you want to replace about 75% of your pre-retirement income after retirement?

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

Answer 1

Part (a)

Expected income before retirement= $80,000 per year

Retirement income needed (75% of above)= 80,000*75% = $60,000

Amount needed on retirement= $747,732.62   as follows:

Annual savings required between now and retirement= $6,189.85 as follows:

Part (b)

Retirement income needed= expected income before retirement= $80,000 per year

Amount needed on retirement=   $996,976.83 as follows:

Annual savings required between now and retirement= $8,253.13 as follows: