Question

You plan to retire in 28 years. You would like to maintain your current level of consumption which is $52,672 per year. You will need to have 30 years of consumption during your retirement. You can earn 5.03% per year (nominal terms) on your investments. In addition, you expect inflation to be 2.82% inflation per year, from now and through your retirement. How much do you have to invest each year, starting next year, for 13 years, in nominal terms to just cover your retirement needs?

Answer 1

Answer:

The amount to invest each year for 13 years is $5,617.37.

Explanation:

This can be calculated using the formula for calculating the present value of an ordinary annuity as follows:

PV = P * ((1 - (1 / (1 + r))^n) / r) …………………………………. (1)

Where;

PV = current level of consumption = $52,672

P = amount to invest each year = ?

r = annual nominal interest rate = 5.03%, or 0.0503

n = number of years = 13

Substituting the values into equation (1) and solve for n, we have:

$52,672 = P * ((1 - (1 / (1 + 0.0503))^13) / 0.0503)

$52,672 = P * 9.37662983027493

P = $52,672 / 9.37662983027493

P = $5,617.37

Therefore, the amount to invest each year for 13 years is $5,617.37.