Mike and Sylvia plan to retire in 20 years and need to save

Mike and Sylvia plan to retire in 20 years and need to save an additional $500,000 (in first-retirement-year dollars) to build a sufficient retirement fund to support their targeted retirement lifestyle. They expect to earn 7% after-tax return on their retirement savings and want to assume a 5% long-term inflation rate. Their preference is to allocate a LEVEL annual savings amount to build this retirement fund.

What level savings amount will Mike and Sylvia need to deposit at the end of each year?

Select one:

a. $11,399

b. $12,196

c. $20,386

d. $20,774

e. $25,000

Solution

Inflton rate 5%. After Tax Rate of Return 7% Nominal Rate of return = 7%-5% 2% Ans- Annual Investment is 20774 Below is the Table to show the future value of investment. Since the investment is made at the end of the year discounting factor is 1 for first year. Discounting Factor Annual Investment At the end of year Future Value                                       1.0000 20774           20,774.00                                       1.0200 20774           21,189.48                                       1.0404 20774           21,613.27                                       1.0612 20774           22,045.53                                       1.0824 20774           22,486.45                                       1.1041 20774           22,936.17                                       1.1262 20774           23,394.90                                       1.1487 20774           23,862.80                                       1.1717 20774           24,340.05                                       1.1951 20774           24,826.85                                       1.2190 20774           25,323.39                                       1.2434 20774           25,829.86                                       1.2682 20774           26,346.46                                       1.2936 20774           26,873.38                                       1.3195 20774           27,410.85                                       1.3459 20774           27,959.07                                       1.3728 20774           28,518.25                                       1.4002 20774           29,088.62                                       1.4282 20774           29,670.39                                       1.4568 20774           30,263.80       5,04,753.56 Note-