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Use this information to answer the next two questions. (Hint: It is really helpful to diagram the problem). Your parents have been negligent in saving for their retirement. When they learned that you're taking a finance class they came to you for advice. They would like to retire in 15 years, but have only saved $50,000 for retirement. They are in good health and estimate that they will live 30 years after retiring. They earn a combined annual income of $180,000 and would like to maintain a consistent quality of life during retirement (that means they will require that same amount annually to live in retirement). They estimate that with their social security checks, this will require an additional $80,000 per year from retirement savings. Their retirement account yields 4% annually. How much of their annual income will they need to save each year to meet their retirement goal?
1. Step one in solving the question above is to calculate the amount that will be needed on the day they retire. Based on the number of years they will live after retiring, and the amount they will need each year, and the interest rate (yield), how much will they need to have accumulated when they start retirement in 15 years? Enter your answer as a positive whole number.
2. Now that you know how much they will need in the bank when they retire (from the previous question). Calculate the amount they will need to save each year to reach that number. Hint: You know they have already saved something, that is their current, or present value. You know what they need in the future (calculated in question #11). The number of years until they reach retirement and the interest rate are given, solve for the required annual payment. It is critical that you watch your signs... remember that the starting amount and the payments are both deposits (or inputs) while the retirement will be a withdrawal (or output). How much do they need to save annually to accomplish their retirement goal? Enter the answer as a whole, positive number.
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