question archive A) Time periods: Your current age is 23, you want to retire at the age 60 and you expect to live until the age 80

A) Time periods: Your current age is 23, you want to retire at the age 60 and you expect to live until the age 80

Subject:FinancePrice:3.86 Bought16

A) Time periods: Your current age is 23, you want to retire at the age 60 and you expect to live until the age 80.

B) The annual expenses (e.g. food & living, rent / mortgage, healthcare, childcare, travelling, etc.): Estimate how much you will need during those retirement years based on today’s dollar. Also, consider increasing the amount over different periods ($20,000 a year in the first 10 years, $30,000 per year over the next 10 years).

C) Inflation rate: 3%

D) Rate of return: 10%

E) Current savings: 0

Questions

1. Compute the future values of each annual expense discussed in [1B] with inflation rate chosen in [1C]. That is, based on the example given, find the future value of the expense you will need in 25 years from today (i.e. when you are 60) by compounding an inflation of, say, 3% per year to the amount in today’s dollars. Repeat this process for all the retirement years. If the expense amounts were assumed to be increasing over time, be sure to consider that in the calculations.

2. Based on the annual expenses worked out in [2], calculate how much total savings you should have on the day you retire (i.e. the present value of all the expenses you need for retirement on the day you will stop working) using the rate of return assumed in [1D].

3. Based on the total savings required found in [3] and the current savings reported in [1E], find out how much you need to save each year now until the day you will stop working, given an interest rate you have described in [1D].

pur-new-sol

Purchase A New Answer

Custom new solution created by our subject matter experts

GET A QUOTE

Answer Preview

Ans 1) Calculation of Future Value of each annual expense :

I = 20000 (expense or investment ), r= 3% , T=10 years

$ 20000 in first 10 years :

Applying Future Value Compunding interest formula :

FV = I * (1+Rt)

=20000* (1+ 0.03 ^10)

= 20000 * (1.34391)

26878.32

$ 30000 in next 10 years :

FV = I * (1+Rt)

=30000* (1+ 0.03 ^10)

= 30000 * (1.34391)

40317.49

Calculation of future value of expense at the time of retirement :

Current age = 23

Retirement Age = 60

Years to Retire = 60- 23 = 37

Requirement Amount = 50000

FV = I * (1+Rt)

=50000* (1+ 0.03 ^37)

= 50000 * (2.98522)

149261.33

Ans 2. Calculation of total savings at the time of retirement :

FV at the time of retirement = 149261.33

Retirement Corpus Calculation :

Calculations are done on excel for better calculations :

Income Reqired at Retirement 149261 Amount required from 60th year
Retirement Age 60 Year
Expected Life after Retirement 80 Year
Retirement Period 20 (80-60)
Rate of return on Corpus 10% Per Annum
Inflation Rate 3% Per Annum
Inflation Adjusted Rate of Return 6.80% (1+Return)/1+Inflation Rate))-1, Per Annum
Per 1  
Value 12  
Retirement Corpus $2,345,534.92 PV Funvtion

Savings at time of retirement :

Retirement Corpus(Future Value) $2,345,534.92 Amount
Years to Retire 25 year
Expected Rate of Return where the savings will be invested 10% per annum
Per 1  
Months in aYear 12  
Amount required at achieve requirement corpus $1,753.16 Savings Per Month

Ans. 3The savings you need to each year to achieve the retirement corpus is :

= 1753.16 * 12= 21037.92

Savings Per year = 21037.92