Question 2: Retirement Savings ..........Please Show Your Work......................

Make the following assumptions:

Inflation = 2%

Standard of living (present value) = $125,000 per year after tax

Tax rate during retirement = 20%

Years until retirement = 25

Return on investments, pre-retirement =10%

Return on investments, post-retirement = 6%

All retirement spending is at end of the year

You will live forever (for simplicity)

(a)

In order to sustain the post-tax standard of living throughout retirement (not just for

the first year), how much money would you need at the beginning of your rst year of retirement

(in that year's dollars)?

What is the Required portfolio value upon retirement?

(b)

What is the present value of the amount in (a)?

(c)

Assuming you save the same dollar amount in each of the 25 years before retirement,

always making contributions at the end of each year (including the 25th year), how much

would you need to save (per year) in order to reach the retirement portfolio value computed

in part (a)?

What is the Per-year savings required?

(d)

Assuming your contributions grow at 3% per year, and always making contributions at

the end of each year (including the 25th year), how big would your rst contribution (one

year from now) need to be in order to reach the portfolio value computed in part (a)

What is the first-year savings required?