Please show your calculations for every problem, You have just inherited a large
ID: 2637462 • Letter: P
Question
Please show your calculations for every problem,
You have just inherited a large sum if money and you are trying to determine how much you should save for retirement and how much you can spend now. For retirement you will deposit today (September 1, 2010) a lump sum in a bank account paying 10% compounded annually. You don't plan on touching this deposit until you retire in five years (September 1, 2015), and you plan on living for 20 additional years and then drop dead on August 31, 2034.During your retirement, you would like to receive income of $60,000 per year to be received the first day of each year, with the first payment on September, 2015, and the last payment in August 31, 2034. Complicating this objective is your desire to have one final three-year fling, during which time you'd like to track down all the original members of the Mr Ed Show and the Monkees and get their autographs. To finance this, you want to receive $300,000 on September 1, 2030 and nothing on September 1, 2030 and September 1, 2032, as you will be on the road. In addition, after you passed you would like to have a total of $100,000 to leave to your children.
a. How much must you deposit in the bank at 10% on September 1 2010, in order to achieve your goal? (Use time line in order to answer this question)
b. What kind of problems are associated with this analysis and its assumptions?
Explanation / Answer
Retirement Corpus 60,000 per year for 20 years from 5 years hence @5%. Let the lump sum amount be $x
x*(1.105) = 60000* PVIFA(10%, 20years)
X= (60000*8.514)/1.61051 = $481447 is required on September1,2010 for achieving the retirement amount goal
Secondly , After 22years you want $300,000. For this he needs to make and additional investment of $y
y= 300,000 / FVIF(22years, 10%) = 300,000/1.122 = $36854
After 25 years he wants $100000. For this he needs additional investment of $z
z = 100000/1.125 = $9230
Total investment = x+y=z = $527521
Cost of inflation is not taken into account in such analysis.