The Smiths save $16,000 per year for retirement. They are now in their mid-thirties, and they expect to have $1 million in today’s dollars saved by the time they’re in their mid-sixties. If their market interest rate is 6% per year and inflation averages 2% a year, is their financial plan possible?
Answer:
Saving per year A=$16000
Market rate r=6%
Inflation rate I=2%
Net real rate of return R =6%-2%=4%
And number of payment N=30 years
Since we need to find the value of saving in today's dollar so we need to calculate FV of this saving
FV=A*((1+R)^N-1)/R
FV=16000*((1+4%)^-30-1)/4%
FV=$897,359
Since future value of annual saving is less than $1 millions so Smiths financial plan is not possible.
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