Question

Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the time he retires as $45,000 has today. (The real value of his retirement income will decline annually after he retires.) His retirement income will begin the day he retires, 10 years from today, at which time he will receive 24 additional annual payments. Annual inflation is expected to be 6%. He currently has $250,000 saved, and he expects to earn 9% annually on his savings. How much must he save during each of the next 10 years (end-of-year deposits) to meet his retirement goal? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

First, we calculate the amount of savings required at the end of 10 years to meet retirement goals

amount of savings required is calculated using the PV function in Excel with these inputs :

rate = 9% - 6% (the expected return on savings is subtracted by the expected inflation to get the real expected return on savings)

nper = 25 (this is the number of years in retirement)

pmt = 45,000 (this is the real income required each year in retirement)

PV is calculated to be $783,591.65

this is the amount of savings required at the end of 10 years from now to fund the retirement

Next, we calculate the annual savings to fund the retirement fund using the PMT function in Excel with these inputs:

rate = 9% (this is the expected return on savings)

nper = 10 (this is the number of years (or number of savings deposits) until retirement

pv = -250,000 (this is the current savings)

fv = 783,591.65 (this is the amount of savings required at the end of 10 years from now to fund the retirement)

PMT is calculated to be $12,621.05

this is the amount of savings required during each of next 10 years