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What should be the equal nominal amount

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You currently have $15,000 to start investing and also have a stable career, so you plan to work for 40 years and then retire; your retirement life is expected to last another 20 years. According to your plan, besides $15,000 initial contribution today, by the end of each working year you need to contribute an extra equal amount of money into your retirement fund until the day you retire. Your retirement fund balance is expected to earn an annual nominal (i.e., inflated) return of 9.71% on average in the US financial market over time.

  • Beginning at the day you retire, you withdraw an equal (not growing) nominal income amount per year from your retirement fund, so as to cover your annual retirement living costs. However, your annual withdrawal income amount will be subject to 15% income tax. Also, the US inflation in the long term is expected to be 2.5% per year. You want your first annual withdrawal nominal amount, after tax, to be sufficient to carry the same purchasing power (i.e., living standard) as today's $35,000. In addition, you want to leave another $300,000 after-tax nominal inheritance to your heirs when your life ends (your heirs will also be taxed 15% on the inheritance that they collect).

Problem 1: To meet all above future financial needs as planned, from now till the day of your retirement, what should be the equal (not growing) nominal amount for you to contribute each working year?

Reference no: EM132760815

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