Question

It is 2016, You have just graduated college, and tou are contemplating your lifetime budget. You think your general pre -retirement living expenses will average around $50000 a year. For the next 8 years, you will rent an apartment for $16000 a year (assume end of period payments). At the end of tear 8 you will want to buy a house that should cost around $250000. In addition you will need buy a new car roughly once wvery 10 years, starting now and continuing for the next 50 years, costing around $30000 each. In 25 years you will haveto put aside around $150000 to put a child through college, and in 30 tears you will need to do the same for spending of around $35000 a year on top of your Social Security benefits. The interest rate is 5% per tear.
a). What average salary will you need to earn to support this lifetime consumption plan? average salary needed...?
b). Whoops you realized that the inflation rate over your lifestyle is likely to average about 3% per year and you need to redo your calculations. As a rough cut, it seems reasonable to assume that all relevant prices and wages will increase at around the rate of inflation. What is your new estimate of the required salary (in today’s dollars?

Answer 1

Answer

Before 8 years 8years to 50 years Expenses Living expenses 50000 rent 16000 250000 buy house 150000 150000 Car College fees of child Social Security benefits 35000 585000 66000 Average Salary per year 8250 13929 Total Average Lifetime Salary Per Year 15215 Lifetime Salary due to inflation per year 15672

Interpretation

The interpretation of the same is made by taking assumption based on the given information:

a.

The lifetime salary is evaluated by considering the expenses and the nature of such kind of expenses. In order to meet the expenses successfully it is required by that individual to earn at least $15215 pe year. The formulae of such calculation are =1+(8250+13929/2).

b.

The lifetime salary is evaluated for the second time by considering inflation in the accounts where the salary amount in tat case tends to raise to $15672 respectively.