Assume you will start on a job as soon as you graduate. You plan to start saving for your retirement when you turn 25 years old. (Assume you are 21 years at the time of graduation. Everybody needs a break!) Currently you plan to retire when you turn 65 years old. 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 a period of 20 years). You can invest, starting when you turn 25 years old, in a portfolio fund. The average inflation rate is likely to be 5 percent.
a. Calculate the lump sum you need to have accumulated at age 65 to be able to draw the desired income. Assume that your return on the portfolio investment is likely to be 10 percent.
Hint: First calculate the inflated value of the yearly retirement income desired for the first year in retirement. Then use the present value of a growing annuity equation to solve for the lump sum required to generate the retirement income stream. Make sure that all cells are properly formatted.
Current age: 21
Age when you begin to save for retirement: 25
Age at which you plan to retire: 65
Expected life span: 85
Desired yearly retirement income in today's dollars: $40,000
Average expected rate of inflation: 5.00%
Desired first year retirement income adjusted for inflation: