Question

Agnes is 40 years old. She wants to know how much she should be saving each year for retirement. Below are the specifics: • She wants to retire at 60 and expects to live until she's 90 • She currently makes $45,000 and expects that to increase each year with inflation (2%). She thinks she will need about 70% of that to live on in retirement. . She has $40,000 in an RRSP Her investments are earning a real rate of 7% When she retires she will move her investments into a more conservative portfolio and earn 3% per year. She expects that CPP will be about $15,000 per year. Given this information, how much will she have saved when she is 60?

Answer 1

We first calculate the present value of her retirement needs She will require 70% of 45000 during her retirement (0.7*45000) 31,500.00 Assuming this amount remains constant (because the question is not very clear) annual withdrwal = Number of withdrwal 16500 (31500-15000) 30 (90-60) Interest rate = 3% calculate the value at 60 PV(3%,30,-16500) 323,407.28 She has 40000 in RRSP which is earning a real rate of 7% Nominal rate = ((1.07)*(1.02)) -1 9.14% after 20 years the value of the account would be 40000*(1+0.0914)^20 230,005.90 Now the amount which she would be required to save for is (323407.28-230005.9) 93,401.38 we again use the excel formula to calculate the value of annual deposit PMT(9.14%,20,0,-93401.38) 1,797.18 So by 60 she would have saved 40000*(1+0.0914)^20 + FV(9.14%,20,-1797.18) 323,407.11