Question

You’ve just graduated college, and you are contemplating your lifetime budget. You think your general pre-retirement living expenses will average around $60,000 a year. For the next 8 years, you will rent an apartment for $16,000 a year (assume end-of-period payments). At the end of Year 8, you will want to buy a house that should cost around $250,000. In addition, you will need to buy a new car roughly once every 10 years, starting now and continuing for the next 50 years, costing around $30,000 each. In 25 years, you will have to put aside around $150,000 to put a child through college, and in 30 years you’ll need to do the same for another child. In 50 years, you will retire and will need to have accumulated enough savings to support roughly 20 years of retirement spending of around $30,000 a year on top of your Social Security benefits. The interest rate is 5% per year.

a. What average salary will you need to earn to support this lifetime consumption plan? 
b. Whoops! You just realized that the inflation rate over your lifetime 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)?