Reference no: EM132410877

You plan to retire in 35 years. During each year of retirement, you want to have an amount of money with the same purchasing power that $50,000 has today. Inflation is expected to be 3% per year from now on

a. How much money do you need in the first year of retirement (35 years from today)? Round your final answer to the nearest dollar.

b. Ignore your answer to "a" and assume you need $125,000 in the first year of retirement. Call it CF1. Note that you withdraw that money 35 years from today (t = 35). Now assume you will keep your retirement savings ("nest egg") in an investment that generates a return of 4% per year, during each year of your retirement and in the year before it starts. You plan to be retired for 27 years. You will continue to need the same purchasing power (during each year of retirement) that $125,000 represents in the first year of retirement. Inflation will remain at 3% per year forever. How much money do you need to have in your retirement account, one year before your retirement starts (this helps with timing issues), to fund (or finance) this stream of withdrawals [i.e. what is the nest egg size at t=34]? Round your final answer to the nearest thousand dollars.

c. Ignore your answer to "b" and assume your nest egg size at [t = 34] is $5,000,000. Also assume that you will save money in an investment that earns 7% per year until [t = 34], to reach your goal. You will make your first savings payment (into the investment) in one year (CF1). You will grow your annual payments by 2% per year. You will make 34 annual payments. How big must your first savings payment be, to reach your goal?