Question

You are 30 years of age and wish to retire at 70. Your plan is to live off $90,000/year until you turn 95. Your plan is to save $25,000/year until you turn 70. Assume a 5% opportunity cost. Make a plan.

Answer 1

Amount required for retirement income Here 1Interest rate per annum 2 Number of vears 3 Number of compoundings per per annum 5% 4 25 6 4 1+3 Interest rate per period (r 5% 25 90,000 7 5 2x3 Number of periods (n) Payment per period (P Amount required for retirement income $ 12,68,455 90000*[1-(1/(1+5%)"25]/5% 10 12 13 14 15 16 17 18 19 1+3 Interest rate per period (r 20 2x3 Number of periods (n 21 Required saving each year (P FVA ((1+r)An-1]r) Here 1Interest rate per annum 2 Number of vears 3 Number of pavments per per annum 5% 5% Future value of annuity (FVA 12,68,45!5 Required saving each year (P 23 24 10,500 1268455/((( 1+5%)40-1)/596)

Actual required savings for his retirement plan was only $10,500 but he is planning to save $25,000 which is very higher than required. So he can reduce the savings per year by $14,500 ($25,000-$10,500)