question archive Part A: By the end of this year you would be 35 years old and you want to plan for your retirement
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Part A:
By the end of this year you would be 35 years old and you want to plan for your retirement. You wish to retire at the age of 65 and you expect to live 20 years after retirement. Upon retirement you wish to have an annual sum of $50,000 to supplement your social security benefits. Therefore, you opened now your retirement account with 7% annual interest rate. At retirement you liquidate your account and use the funds to buy an investment grade bond which makes $50,000 annual coupon payments based on a 6 % coupon rate, throughout your retirement years.
Now let’s extend the problem so that you protect yourself against inflation.
Part B:
Suppose you think if you were to retire right now you would have needed $50,000 each year to supplement your social security and maintain your desired lifestyle. But because there is on average 3% annual inflation, when you retire in 30 years from now you need more than $50,000 per year to maintain the lifestyle you like.
(Hint: First calculate what future amount in 30 years, which is equivalent to $50,000 of now and then solve the rest of the problem).