Consider Karl, an individual investor. Karl is 40 years old, earns after-tax income of $50,000 per year, expects to retire at age 65, and receive after-tax Social Security payments in retirement of $20,000/year. Karl has a current net worth of $125,000 and the after-tax return on investment is 1% per year. He believes he will continue to earn $50,000 per year in real terms over the next 25 years.

Required:

Assuming Karl believes he may live as long as 100 years, what is the maximum steady rate of consumption that he can maintain while keeping net worth positive through age 100? How does your answer change if the return on investment is 3% per year instead of 1%?

Answer rating: 100% (QA)

Assuming interest rate 10 After tax income50000 Presen... View the full answer