Question

In: Finance

You plan to retire in 28 years. You would like to maintain your current level of...

You plan to retire in 28 years. You would like to maintain your current level of consumption which is $57,316 per year. You will need to have 25 years of consumption during your retirement. You can earn 4.01% per year (nominal terms) on your investments. In addition, you expect inflation to be 2.96% inflation per year, from now and through your retirement. How much do you have to invest each year, starting next year, for 6 years, in nominal terms to just cover your retirement needs?

Solutions

Expert Solution

First We have to calculate how much amount is required for his retirement

Given Annual Expenditure is $57316 with an inflation rate of 2.96%.

The amount required in his 1st year of retirement = $57316*[(1.0296)^28]=$129716.

The amount in year 2 of retirement = $129716.*1.0296=133555

And so on and so forth till year 25.

Hence the sum total of the amount required for retirement in nominal terms= $129716+$129716*1.0296+$129716*(1.0296)^2+..........+$129716.*(1.0296)^25= $4704604.68

Let X be the anount invested every year for the next 6 years starting next year.

Therefore,

x(1.0401)^27+x(1.0401)^26+x(1.0401)^25+x(1.0401)^24+x(1.0401)^23+x(1.0401)^22=4704604.68

=>x= 298576.47(Answer)


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