Question

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?

Answer 1

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)