Question

The Smiths save $16,000 per year for retirement. They are now in their mid-thirties, and they expect to have $1 million in today’s dollars saved by the time they’re in their mid-sixties. If their market interest rate is 6% per year and inflation averages 2% a year, is their financial plan possible?

Answer 1

Answer:

Saving per year A=$16000

Market rate r=6%

Inflation rate I=2%

Net real rate of return R =6%-2%=4%

And number of payment N=30 years

Since we need to find the value of saving in today's dollar so we need to calculate FV of this saving

FV=A*((1+R)^N-1)/R

FV=16000*((1+4%)^-30-1)/4%

FV=$897,359

Since future value of annual saving is less than $1 millions so Smiths financial plan is not possible.