Question

This is the full questions no more details. take any amount you need to accomplish this problem.

1. Choose a salary that you want to have at age 25. Assume that you get raises that keep up with the cost of inflation. Assume that you contribute 10% of your income to your retirement plan. Assume your own rate of return on your money.

How much do you need to have saved if you retire at 40 and live to 90?

How much do you need to have saved if you retire at 65 and live to 90?

Note: Show all of your calculations

Answer 1

The salary now at age 25 is assumed to be $60,000

Nominal rate of return on money is assumed to be 9%. It is given in the question that raises keep up with inflation. This means that the real salary remains constant.

If I retire at 40 and live upto 90, the savings at the age of 40 must be enough to provide annual withdrawals equal to the current real salary for a period of 50 years. The savings required at age 40 is calculated using PV function in Excel :

rate = 9% - rate of return on money.

nper = 50 - number of years in retirement = 90 - 40 = 50

pmt = 60,000 - annual withdrawal from savings = current salary

PV is calculated to be $657,701

This is the money to be saved if I retire at 40 and expect to live to 90

If I retire at 65 and live upto 90, the savings at the age of 40 must be enough to provide annual withdrawals equal to the current real salary for a period of 25 years. The savings required at age 65 is calculated using PV function in Excel :

rate = 9% - rate of return on money.

nper = 25 - number of years in retirement = 90 - 65 = 25

pmt = 60,000 - annual withdrawal from savings = current salary

PV is calculated to be $589,355

This is the money to be saved if I retire at 65 and expect to live to 90