Assume a person saves diligently in some longterm savings pl

Assume a person saves diligently in some long-term savings plan for 50 years and retires with $800,000 in his or her retirement account. How much purchasing power would that amount have in today’s dollars if the annual inflation rate averaged about 2.5% over those same 50 years?

Solution

Present value = 1/(1+i)ⁿ

Let x be the present value of 800,000.

Then present value of 800,000

x(1.025)⁵⁰ = 800,000

x = 800,000/(1.025)⁵⁰

x = $232,753.77