Saving for Retirement
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1. Assume that you are 40 years old and wish to retire at age 65. You expect to be able to average a 6% annual rate of interest on your savings over your lifetime (both prior to retirement and after retirement). You would like to save enough money to provide $8,000 per year beginning at age 66 in retirement income to supplement other sources (social security, pension plans, etc.). Suppose you decide that the extra income needs to be provided for only 15 years (up to age 80). Assume that your first contribution to the savings plan will take place one year from NOW.
a. How much must you save each year between now and retirement to achieve your goal?
b. If the rate of inflation turns out to be 6% per year between now and retirement, how much will your first $8000 withdrawal be worth in terms of today's purchasing power?
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SOLUTION:
a. Age 40 41 65 66 80
Time 0 1 25 26 40
. . . .
X X 8,000 8,000
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