Reference no: EM133120698
Suppose you are 25 years old and currently make $70,000 per year. [Obviously, your personal details are different, but once you finish this problem, you will have a retirement calculator built where you can later specify your own age and salary details].
a. Suppose you intend to retire at the age of 65, exactly 40 years now. If the inflation rate over the next 40 years is expected to average 2.5% per year, how much money will you have to be earning at the start of your retirement to have the same purchasing power your $70,000 salary today? For this part and all following parts, please ignore taxes.
b. Assume you believe you will actually need to have $250,000 per year to live comfortably in retirement to allow for your passion for travel and a reasonably comfortable lifestyle. You believe you will live to your 100th year (35 years after retirement) which will be the average life span for people retiring in the year 2058, the year you retire. You believe that the rate of return on your investments will be 5% per year in retirement.
How much of a "nest egg" or retirement fund must you have in order to start paying yourself $250,000 per year on the first day of retirement and the beginning of each year thereafter until your 100th year?
c. Assume you want to start saving for your retirement "nest egg" goal (in part b). Since you are 25, you believe you can be more aggressive with your investments and therefore expect to earn 8% while saving for retirement. Additionally, your grandparents left you with a $50,000 cash inheritance that you will invest (at 8%) to help fund your retirement nest egg. If you start saving at age 25 and plan to save until you retire at age 65, how much must you save each year (at the end of the year) to reach your financial goal in part (b)?
d. Suppose you had unusually better luck than expected and earned 9% per year on your portfolio instead of 8% during the 40 years you were saving for retirement. If your annual saving was the amount found in part (c), how much money would you be able to live on in retirement each year assuming you live to age 100? Again, assume you can earn 5% in retirement and pay yourself at the beginning of each year.
e. Assume instead, that by the time you reach your retirement, you have accumulated a $4,000,000 nest egg. Further, assume you are spendthrift and live on $300,000 per year and you only earn 4% per year on your money instead of 5%. In how many years will you run out of money?
f. Using information from part (e) (i.e., the $4,000,000 nestegg and 4% interest rate), what is the most that could be withdrawn from your account each year (in equal amounts) so that the account never runs out of money? I.e., it goes on for perpetuity. Remember, you are withdrawing money at the beginning of each year.