Question

1.Mr. Homer, who turned 36 years old today, is getting serious about retirement planning. He has $85,000 already set aside in his retirement account and plans to add an equal amount in real terms at the end of each of the next 33 years so that he can retire at age 69. His goal is to build a retirement account that will enable him to make 25 annual withdraws with a purchasing power of $75,000 (at today’s prices) on his 70th through 94th birthdays. His retirement account is expected to earn 5.50% per year and the expected inflation rate is 2.50% per year. How much does Mr. Homer need to set aside in real terms at the end of each of the next 33 years to meet his retirement goal

Round your answer to the nearest penny. For example, $2,371.243 should be entered as 2371.24.

Answer 1

1. Computation of Real Rate of Return

Real rate of return = [(1 + Nominal rate) / (1 + Inflation rate)] - 1

Real rate of return = [(1 + 0.055) / (1 + 0.025)] - 1

Real rate of return = 1.029268 - 1

Real rate of return = 2.9268%

2. Present value of annual withdrawals of $75000 per year for 25 years: $1316698.02

2. Annual Contribution Required to reach retirement goal:$20172.73

Thus Answer $20172.73