Question

You are trying to get your retirement savings in order. You plan to retire in 27 years. For retirement, you calculate that you will need $75,000 per year in today’s dollars, and that you will start taking annual withdrawals from the account 27 years from today. To be safe, you assume you will need to make 40 withdrawals (i.e., live 40 years in retirement), and you assume inflation will be 2% per year forever.You plan on contributing a fixed percentage of your salary every year for the next 27 years to achieve your retirement needs with the first contribution made one year from today. If your salary is $100,000 and you expect to get 5% raises each year, what percentage of your salary do you need to save? Again assume your 401k is expected to earn 8% per year.

Answer 1

$ Salary Years to retirement #withdrawals Amount required(per year) 10,00,000 27 40 75,000 $ Inflation rate Raise(per year) Interest rate 2% (constant forever) 5% 8% Amount needed in account Amount of withdrawal each year % salary to save Formulae *-29,64,119.58 PV (1.08/1.02-1)%,C4,C5) 1,11,853.67 PMT((1.08*1.05-1)%,C3,C11) 11.19% C12/C2