As a financial consultant you are helping a client who just won a fortune in Las Vegas, plan his retirement. He plans to deposit his newly won fortune in his bank today (January 1, 2016) in a savings account that pays 5% interest compounded annually. He will retire in 25 years (on January 1, 2041), and he expects to live for another thirty years beyond his retirement, (until December 31, 2070). His wife is expected to live an additional five years (until December 31, 2075). He wants a retirement income of $20,000 per year during his retirement years, the first payment to be received on January 1, 2041, and the last on January 1, 2070. Further, he wants his wife to have an income of $10,000 after he is gone, or $10,000 on each January 1, from 2071 through 2075. Finally, he plans to take a trip to the moon in 2046 and be gone for two years, so he wants to receive $40,000 on January 1, 2046 and nothing on January 1, 2047.
How much must he deposit on January 1, 2016, to attain his retirement goals?
In terms of current dollars, how much will his $20,000 of income in 2041 be worth in 2016 if we experience a constant 8% rate of inflation?
What are the major weaknesses of this financial plan? Assume this is the only source of retirement income.