Suppose James and Frank both retire this year. For income during retirement, James will rely on a pension from his company that pays him a fixed $2,500 per month for as long as he lives. James hasn't saved anything for retirement.
Frank has no pension but has saved a considerable amount, which he has invested in certificates of deposit (CDs) at his bank. Currently, Frank's CDs pay him interest of $2,300 per month.
a. Ten years from now, is James or Frank likely to have a higher real income? In your answer, be sure to define real income.
b. Now suppose that instead of being a constant amount, James's pension increases each year by the same percentage as the CPI. For example, if the CPI increases by 5 percent in the first year after James retires, then his pension in the second year equals $2,500 + ($2,500 × 0.05) = $2,625. In this case, 10 years from now, is James or Frank likely to have a higher real income?