Assume you are now 21 years old and will start working as soon as you graduate from college. You plan to start saving for your retirement on your 25th birthday and retire on your 65th birthday. After retirement, you expect to live at least until you are 85. You wish to be able to withdraw $36,000 (in today's dollars) every year from the time of your retirement until you are 85 years old (i.e., for 20 years). The average inflation rate is likely to be 5 percent.
Assume you are now 21 years old and will start working as soon as you graduate from college. You plan to start saving for your retirement on your 25th birthday and retire on your 65th birthday. After retirement, you expect to live at least until you are 85. You wish to be able to withdraw $36,000 (in today's dollars) every year from the time of your retirement until you are 85 years old (i.e., for 20 years). The average inflation rate is likely to be 5 percent.
Chapter5: The Time Value Of Money
Section: Chapter Questions
Problem 44P
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Transcribed Image Text:Assume you are now 21 years old and will start working as soon as you graduate from college. You plan to start saving for your
retirement on your 25th birthday and retire on your 65th birthday. After retirement, you expect to live at least until you are 85. You
wish to be able to withdraw $36,000 (in today's dollars) every year from the time of your retirement until you are 85 years old (i.e., for
20 years). The average inflation rate is likely to be 5 percent.
Problem 6.42(a)
Your answer is correct.
Calculate the lump sum you need to have accumulated at age 65 to be able to draw the desired income. Assume that the annual
return on your investments is likely to be 10 percent. (Round answer to 2 decimal places, e.g. 15.25. Round intermediate value to 3
decimal places, e.g. 359400.312. Do not round factor values.)
Lump sum amount accumulated at age 65 $
3917778.11
Problem 6.42(b)
Your answer is correct.
What is the dollar amount you need to invest every year, starting at age 26 and ending at age 65 (i.e., for 40 years), to reach the
target lump sum at age 65? (Round factor values to 4 decimal places, e.g. 1.5212 and final answer to 2 decimal places, e.g. 1,525.12.)
Investment needed to reach the target
$
8851.88
Problem 6.42(c)
Now answer parts a. and b. assuming the rate of return to be (i) 8 percent per year, and (ii) 15 percent per year. (Round answers to O
decimal places, e.g. 1,525.)
8 percent
15 percent
Lump sum needed at age 65
$
$
Annuity payment needed
$
+A
$
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