You decide you would like to retire at age 65, and expect to live until you are 85 (assume there is no chance you will die younger or live longer). You figure that you can live nicely on $50,000 per year.
a. Describe the calculation you need to make to determine how much you must save to purchase an annuity paying $50,000 per year for the rest your life. Assume the interest rate is 7 percent.
b. If you want to keep your purchasing power constant, how would your calculation change if you expected inflation to average 2 percent for the rest of your life?