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What cash balance do need in retirement account

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Reference no: EM132943213

Today is your 35th birthday and it occurs to you that your current retirement savings may be insufficient to maintain for you the lifestyle to which you have become accustomed.

  • The value of your retirement account today on your 35th birthday is $100,000.
  • You plan to retire on your 65th birthday and to live until the day before your 83rd birthday.
  • Your goal is to have a stream of cash payments on your 66th through 82nd birthdays that provides you with $150,000 of consumption annually in terms of today's purchasing power.
  • Your retirement account earns 10% per year (this is the effective annual rate), and the inflation rate is 2% forever.
  • Ignore the value of your other assets and perform calculations as if deposits, withdrawals, and compounding of interest occur only once a year.

Problem 1: What is the nominal value of the cash payment at your 66th birthday (in dollars of that year)?

Problem 2: What is the nominal value of the cash payment at your 75th birthday (in dollars of that year)?

Problem 3: What is the nominal value of the cash payment at your 80th birthday (in dollars of that year)?

Problem 4: What is the nominal value of the cash payment at your 82th birthday (in dollars of that year)?

Problem 5: What cash (nominal) balance do you need in your retirement account on your 65th birthday to provide you with your desired retirement spending stream; i.e., what is the PV of all the cash flows at your 65th birthday received between your 66th and 82th birthday?

Reference no: EM132943213

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