You are planning for an early retirement. You would like to retire at age 40 and have enough money saved to be able to draw $240,000 per year for the next 35 years (based on family history, you think you will live to age 75). You plan to save by making 10 equal annual installments (from age 30 to age 40) into a fairly risky investment fund that you expect will earn 16% per year. You will leave the money in this fund until it is completely depleted when you are 75 years old.
Requirements
1. How much money must you accumulate by retirement to make your plan work?
2. How does this amount compare to the total amount you will draw out of the investment during retirement? How can these numbers be so different?
3. How much must you pay into the investment each year for the first 10 years?
4. How does the total “out-of-pocket” savings compare to the investment’s value at the end of the 10-year savings period and the withdrawals you will make during retirement?