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Jim goes to work at age 25

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Suppose that Jim goes to work at age 25, earns an average $40,000 a year for 40 years. He inherits $320,000 when he starts working. He expects to live to be 75.

(A) Calculate on average how much Jim consumes per year, the ratio of his annual consumption to annual income, and his annual savings rate.

(B) Suppose now that Jim learns he can expect to live to be 85. If Jim does not change his retirement age, compute Jim's new annual consumption, as well as the new ratio of annual consumption to annual income, and his new annual savings plan.

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The solution assists with computing annual consumption.

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Assumption: Jim is going to devise a plan so that his net savings by the time he dies is 0. He is not going to leave behind anything

(A) Calculate on average how much Jim consumes per year, the ratio of his annual consumption to annual income, and his annual savings ...

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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