Question

Richard and his dad decide to start saving for retirement at the same time. Richard is 20 years old and his dad is 40 years old. Both plan to put money into an IRA until they are 65. Both invest in the same things and earn the same rate of return which is 7%. Finally, in their retirement years, both believe they can score an APR of 4%. If they both want to receive $2,000 per month during retirement then how much does each have to save now if they each plan to live an additional 25 years in retirement? The dad would need to save $__ per month & Richard would need to save $__ per month?

Answer 1

Calculation for Dad:

Step 1) calcualte the total amount that should be there in the retirement account at the time of retirement to achieve 2000 per month expense this is calculated as follows:

We are given the following information:

Monthly payment	PMT	$            2,000.00
rate of interest	r	4.00%
number of years	n	25
Monthly Compounding	frequency	12
Present value	PV	To be calculated

We need to solve the following equation to arrive at the required PV

So the retirement acconut should have $378,904.97 at the time of retirement.

Step 2) Now we need to calculate the monthly savings that will amount to  $378,904.97 at retirement, it is calculated as follows:

We are given the following information:

Monthly payment	PMT	To be calculated
rate of interest	r	7.00%
number of years	n	25
Annual Compounding	T	12
Future value	FV	$        378,904.97

We need to solve the following equation to arrive at the required FV

So the dad needs to save $467.74 per month.

Calculation for Son:

Step 1) As the time after retirement is the same, the amount required in the retirement account is the same too. So the retirement acconut should have $378,904.97 at the time of retirement.

Step 2) Now we need to calculate the monthly savings that will amount to  $378,904.97 at retirement, it is calculated as follows:

We are given the following information:

Monthly payment	PMT	To be calculated
rate of interest	r	7.00%
number of years	n	45
Annual Compounding	T	12
Future value	FV	$        378,904.97

We need to solve the following equation to arrive at the required FV

So the son needs to save $99.91 per month