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

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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].