Imagine you just finished 30 years-old, earning $60,000per year paid at the end of each year. Assume you have total (net) financial asset of $10,000. Your salary grows at a nominal rate of 3% per year until you retire at the end of age 65 (35 full years of working). After retirement, you are entitled to receive a pension paying 50% of your last salary (in nominal terms) for the rest of your life (your pension would remain constant in real terms). Assume a nominal valuation rate of 5%, an inflation rate of 1.5%, and a planning horizon to age 95 (30 full years of retirement). Your current subsistent consumption is $20,000 (paid at the end of the year). You expect your subsistent consumption to grow at nominal rate of 2% until you retire (the first 35 years). After retirement, it declines by 2% per year (nominal rate) until the end of age 95. Your goal is to maintain a real (after-inflation) constant discretionary consumption (standard of living) for the rest of your life. In this question, please ignore income taxes, as well as the many frictions, costs and sources of uncertainty in life. Please answer:
 
Part A: What is the highest real & constant standard of living that you can achieve?
 
Part B: What fraction of your fifth salary (salary at the end of age 35) should you save to achieve your financial goal? Do not forget subsistent consumption.
 
Part C: How much financial capital should you have at age 65, so that you can achieve your financial goal? This is also known as your target "retirement nest egg"

Answer rating: 100% (QA)

A The highest real constant standard of living that can be achieved is 20 000 This is calcul... View the full answer