Question

Peter and Blair recently reviewed their future retirement income and expense projections. They hope to retire in 29 years and anticipate they will need funding for an additional 20 years. They determined that they would have a retirement income of $54,000 in today's dollars, but they would actually need $75,017 in retirement income to meet all of their objectives. Calculate the total amount that Peter and Blair must save if they wish to completely fund their income shortfall, assuming a 2 percent inflation rate and a return of 6

Answer 1

Based on the number of years that Peter and Blair have till retirement, the total amount that they need to save to completely fund their income shortfall is $65,545.72.

What amount do Peter and Blair need to save?

First, find the income shortfall:

= 75,017 - 54,000

= $21,017

The amount they need to save to cover this shortfall is the future value of this amount at retirement. The rate will be the real rate which is:

= 6% - 2% inflation

= 4%

The future value is:

= Income shortfall x future value interest factor, 4%, 29 years

= 21,017 x 3.1187

= $65,545.72

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