Question

Mike and Sylvia plan to retire in 20 years and need to save an additional $500,000 (in first-retirement-year dollars) to build a sufficient retirement fund to support their targeted retirement lifestyle. They expect to earn 7% after-tax return on their retirement savings and want to assume a 5% long-term inflation rate. Their preference is to allocate a LEVEL annual savings amount to build this retirement fund.

What level savings amount will Mike and Sylvia need to deposit at the end of each year?

Select one:

a. $11,399

b. $12,196

c. $20,386

d. $20,774

e. $25,000

Answer 1

Inflton rate	5%.
After Tax Rate of Return	7%
Nominal Rate of return =	7%-5%	2%
Ans- Annual Investment is 20774
Below is the Table to show the future value of investment. Since the investment is made at the end of the year discounting factor is 1 for first year.
Discounting Factor	Annual Investment At the end of year	Future Value
1.0000	20774	20,774.00
1.0200	20774	21,189.48
1.0404	20774	21,613.27
1.0612	20774	22,045.53
1.0824	20774	22,486.45
1.1041	20774	22,936.17
1.1262	20774	23,394.90
1.1487	20774	23,862.80
1.1717	20774	24,340.05
1.1951	20774	24,826.85
1.2190	20774	25,323.39
1.2434	20774	25,829.86
1.2682	20774	26,346.46
1.2936	20774	26,873.38
1.3195	20774	27,410.85
1.3459	20774	27,959.07
1.3728	20774	28,518.25
1.4002	20774	29,088.62
1.4282	20774	29,670.39
1.4568	20774	30,263.80
		5,04,753.56
Note-