Please help (7) Gerald Goh is 35 this year and is planning for retirement. He in
ID: 2797528 • Letter: P
Question
Please help
(7) Gerald Goh is 35 this year and is planning for retirement. He intends to retire at age 65 and he is confident of achieving a nominal rate of return of 5% post retirement. Currently, his current expenditure is $7,500 monthly which includes $3,500 in mortgage payments which he will complete by age 50. The inflation rate is estimated to be at 2.5% and mortality age for males is at 82. What is Gerald's capital sum required at retirement? (5 marks) (8) Define what is a "Trust" and 2 advantages it has over a will (5 marks)Explanation / Answer
First, we need to determine the real rate earned on investment;
This is simply the Nominal Rate - Inflation Rate = 5-2.5 = 2.5%
Next, we need to find the regular expenses post retirement which will determine the absolute level of miminum return required.
As can be observed, at the time of retirement, his mortgage payments would have been paid for and his regular expenditure would be limited to 7500-3500 = $4000
Finally, we can find the sum required at retirement as 4000/2.5% = $160,000
Thus, Gerald needs to accumulate $160,000 at retirement through which he will be able to earn $4,000 reflecting 2.5% return.