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25 Apr 2018

You determine that to retire comfortably you need $2.5 million by the time you retire, in 35 years. How much do you need to save per month (at the end of each month) if the average return on your savings will be 8% per year?

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Deanna Hettinger
Deanna HettingerLv2
25 Apr 2018

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Using TVM techniques, calculate the amount of savings you will need to comfortably retire. Be as specific as possible and discuss how you arrived at your conclusion. Justify your rate of return choice

Assume you are planning on your retirement today, you decide to invest part of your salary every month in your retirement account. Suppose you will retire when you are 67 years old, your life expectancy is 87 if you are male and 90 if you are female and the inflation rate will be 2.5% a year. For your retirement account the rate of return is 6.5% a year before you retire and after retirement, you will invest more conservatively and the rate of return will be 4.5% a year. To figure out how much you need to save in your retirement account a month before you retire, you ask yourself the following questions

1. Tell us you age today

2. You believe you will live comfortable today with $2,000 a month, how much do you need a month after you retire at 67? Assuming you will need the same amount during the retirement period

3. How much do you need when you are at 67 so you can withdraw the amount we discussed in the question 2 until the last day of your life?

4. Suppose your salary will increase 3% a year and your saving will also increase 3% a year, tell us how much do you need to save in the first month so you will have the same amount we calculated in question 3. (Hint suppose your saving will be increasing .5% a month)

5. Redo question 4 if you will start to save 10 years, instead of today, how much do you need to save in the first month?

Suppose you wish to retire forty years from today. You determinethat you need $50,000 per year once you retire, with the firstretirement funds withdrawn one year from the day you retire. Youestimate that you will earn 6% per year on your retirement fundsand that you will need funds up to and including your 25th birthdayafter retirement. How much do you need to save each year over thenext 40 years to achieve your goal?

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