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Finance Future value/ Present value

Assume you intend to retire 25 years from today. During your retirement years you need to have an annual income flow of $86,000 per year for 15 years with the amount occurring exactly 25 years from today. On the 15th year of retirement, in addition to the lump sum, you need an additional $150,000 for miscellaneous purposes. You currently have $10,000 saved for retirement. Assume you have a discount rate of 14%, calculate the equal annual deposits that you must make for the next 25 years( with the first deposit occurring one year from today) to achieve your desired retirement flow.

Solution Preview

The key lies in understanding the problem. Let us break the problem up in 2 parts, part 1 deals with pre- retirement and part 2 deals with post retirement. Please also see the attached Excel Spreadsheet.

Part 1)
At the end of year 1 put in the retirement fund $x.
At the end of the second year the you have accumulated interest on the amount in the bank in the first year and also put in your $x for the second year.

It is better to see it in Excel. In this I have used 2 columns. In the first column I have shown the amount that you need to put in, in the second column I have shown how much your bank will have for your retirement account. Once you break it up in the time series, as I have done ...

$2.19