Question

Assume you are now 21 years old and will start working as soon as you graduate from college. You plan to start saving for your retirement on your 25^thbirthday and retire on your 65^thbirthday. After retirement, you expect to live at least until you are 85. You wish to be able to withdraw $40,000 (in today’s dollars) every year from the time of your retirement until you are 85 years old (i.e., for 20 years). The average inflation rate is likely to be 5 percent.

Calculate the lump sumyou need to have accumulated at age 65 to be able to draw the desired income. Assume that your annual return on your investment is likely to be 10 percent. You will need to use Equation 6.5 to find the present value of a growing annuity, where your withdrawal or cash flow is your answer a. above, interest rate is 10% and growth rate is 5% and n = 20.  (3 points)

Answer 1