Question

A worker wants to set aside some money for retirement, hoping to live off the interest income. If the interest rate is 10% and the worker wishes to draw interest of $50,000 per year, how much should the worker save before retirement? a) 50,000,000 b) 1,000,000 c) 10,000,000 d) 500,000

Answer 1

Answer:

d) 500,000

Explanation:

The amount that the worker is expected to save before retirement is the present value of the expected annual withdrawal using the interest rate of 10% as the discount rate:

savings balance at retirement=yearly cash withdrawal/interest rate

yearly cash withdrawal=$50,000

interest rate=10%

savings balance at retirement=$50,000/10%

savings balance at retirement$500,000