Financial Accounting

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Handout Problem (For the second assignment)

You just turned 35 years old and you are looking to save for retirement. You are planning on making yearly deposits starting next year for the next 30 years (a total of 30 annual deposits with the first deposit occurring on your 36th birthday and the last deposit on your 65th birthday). One year after you make your last deposit, you will begin making withdrawals to fund your living expenses. Since your current yearly expenses are $45,000, you expect that you will need $45,000 per year in real terms when you retire. You plan to withdraw funds over 20 years (the first withdrawal you will make will be as of your 66th birthday and last withdrawal will be on your 85th birthday for a total of 20 withdrawals). After the last withdrawal, you do not want any money left over in your retirement account. The interest rate in nominal terms is 9% and the inflation rate is 4%.

1) How much money will you withdraw in nominal terms on your 70th birthday? In nominal terms on your 75th birthday?

2) How much money do you need in your retirement account in real terms on your 65th birthday?

3) How much money will you need to save each year in real terms in order to fund your retirement needs if you make constant deposits in real terms? What would your nominal deposit be on your 40th birthday? What would your nominal deposit be on your 60th birthday?

4) How much money will you need to save each year in nominal terms in order to fund your retirement needs if you make constant deposits in nominal terms?
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