As of today, Travis and Alison have a joint investment account with $400,000 in assets.  They are 40 years old and their household income is about $200,000 per annum.  Their current consumption expenditures amount to $101,000 per annum.  They are planning for a retirement lifestyle that is consistent with their current living standard and they are targeting for 20 years of such retirement living.  That is, they wish to save enough money so that they can maintain their current level of consumption for 20 years after retirement.  The inflation rate is expected to be 4 percent per annum and the nominal return on investment is 10%.  Travis and Alison will work for another 15 years before they retire.  

How much do they need to contribute to their retirement savings to achieve the goal? {For ease of calculation we shall assume that all future payments occur at the end of the period, the only exception is the $400,000 assets Travis and Alison have in the joint investment account today. 

 

Step 1: Solve the problem using the constant-dollar approach.  That is, use real values and real return for the constant-dollar approach.

Step 2: Solve the problem using the nominal-dollar approach and the calculated outcomes in the constant-dollar approach.

Answer rating: 100% (QA)

Step 1 Constantdollar approach To solve the problem using the constantdollar approach we need to con... View the full answer