Question

4. How much must be saved to ensure that the principal is not liquidated?

Answer 1

Years before retirement = 30

Rate of return before retirement = 8%

Inflation Rate = 3.25%

So, Actual rate of return = 8 - 3.25 = 4.75%

If they start saving money from now every year, then their first year's amount will get a return for 30 years, next year will get a return for 29 years, and so on.

So, If the amount is k then,

k * 4.75% * 30 + k * 4.75% * 29 + ........ + k * 4.75% * 1 = 85000

or, k = 3850 [If you calculate in excel you will get it easily]

So, If he save $3850 every year he will have $85000 at the time of his retirement.