EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 5.A, Problem 1P
Summary Introduction
To determine:
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After some calculations, you realize that your inflation -
adjusted retirement income shortfall is $44, 244 per
year. You anticipate that once you retire, you will be
retired for 36 years. How much at a minimum should
you have saved at the time of your retirement, if you
estimate that your 60/40 equity/debt retirement
portfolio will have a real (net of inflation) return of
5.29% on average? For simplicity, assume that once you
retire you will be withdrawing the necessary amount
from your portfolio at the end of each year.
Suppose that your retirement benefits during your first year of retirement are $60,000 per year which is just enough to
meet your cost of living during the first year. However, your cost of living is expected to increase at an annual rate of
5% due to inflation. If there is no cost-of-living adjustment in your retirement pension, then some of your future living
cost has to come from savings other than retirement pension. If your saving account earns 7% interest a year, how much
should you set aside in order to meet this future increase in the cost of living for 25 years?
O $428,985.67
O S1,128,200.66
O $699,214.99
O $34,960.75
1. Assume that your father is now 50 years old, that he plans to retire in 10 years, and that he
expects to live for 25 years after he retires-that is, until age 85. He wants his first
retirement payment to have the same purchasing power at the time he retires as GH¢ 40,000
has today. He wants all of his subsequent retirement payments to be equal to his first
retirement payment. (Do not let the retirement payments grow with inflation: Your father
realizes that the real value of his retirement income will decline year by year after he
retires.) His retirement income will begin the day he retires, 10 years from today, and he
will then receive 24 additional annual payments. Inflation is expected to be 5% per year
from today forward. He currently has GH¢ 100,000 saved up; and he expects to earn a
return on his savings of 8% per year with annual compounding. To the nearest dollar, how
much must he save during each of the next 10 years (with equal deposits being made at the
end of each year,…
Chapter 5 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 5.A - Prob. 1PCh. 5.A - Prob. 2PCh. 5.A - Prob. 3PCh. 5.A - Prob. 4PCh. 5.A - Prob. 5PCh. 5.A - Prob. 6PCh. 5 - Prob. 1QTDCh. 5 - Prob. 2QTDCh. 5 - Prob. 3QTDCh. 5 - Prob. 4QTD
Ch. 5 - Prob. 5QTDCh. 5 - Prob. 6QTDCh. 5 - Prob. 7QTDCh. 5 - Prob. 8QTDCh. 5 - Prob. 9QTDCh. 5 - Prob. 10QTDCh. 5 - Prob. 11QTDCh. 5 - Prob. 12QTDCh. 5 - Prob. 13QTDCh. 5 - Prob. 14QTDCh. 5 - Prob. 15QTDCh. 5 - Prob. 16QTDCh. 5 - Prob. 17QTDCh. 5 - Prob. 18QTDCh. 5 - Prob. 19QTDCh. 5 - Prob. 1PCh. 5 - Prob. 2PCh. 5 - Prob. 3PCh. 5 - Prob. 4PCh. 5 - Prob. 5PCh. 5 - Prob. 6PCh. 5 - Prob. 7PCh. 5 - Prob. 8PCh. 5 - Prob. 9PCh. 5 - Prob. 10PCh. 5 - Prob. 11PCh. 5 - Prob. 12PCh. 5 - Prob. 13PCh. 5 - Prob. 14PCh. 5 - Prob. 15PCh. 5 - Prob. 16PCh. 5 - Prob. 17PCh. 5 - Prob. 18PCh. 5 - Prob. 19PCh. 5 - Prob. 20PCh. 5 - Prob. 21PCh. 5 - Prob. 22PCh. 5 - Prob. 23PCh. 5 - Prob. 24PCh. 5 - Prob. 25PCh. 5 - Prob. 26PCh. 5 - Prob. 27PCh. 5 - Prob. 28PCh. 5 - Prob. 29PCh. 5 - Prob. 30PCh. 5 - Prob. 31PCh. 5 - Prob. 32PCh. 5 - Prob. 33PCh. 5 - Prob. 34PCh. 5 - Prob. 35PCh. 5 - Prob. 36PCh. 5 - Prob. 37PCh. 5 - Prob. 38PCh. 5 - Prob. 39PCh. 5 - Prob. 40PCh. 5 - Prob. 41PCh. 5 - Prob. 42PCh. 5 - Prob. 43PCh. 5 - Prob. 44PCh. 5 - Prob. 45P
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- To live comfortably in retirement, you decide you will need to save $2 million by the time you are 65 (you are 30 years old today). You will start a new retirement savings account today and contribute the same amount of money on every birthday up to and including your 65th birthday. Using TVM principles, how much must you set aside each year to make sure that you hit your target goal if the interest rate is 5%? What flaws might exist in your calculations, and what variables could lead to different outcomes? What actions could you take ensure you reach your target goal?arrow_forwardYou have decided that in order to have a comfortable retirement you will need to replace $65,000 in income each year in retirement. Assuming you will need 20 years of retirement income and an inflation rate of 3.5%, how much will you need to have saved up in order to meet your goal on the day you retire?arrow_forwardYou have determined that you will need to accumulate $1,000,000 in your retirement account in order to cover your inflation-adjusted shortfall. Which of the following is closest to the amount of money you would need to put into a tax-deferred retirement account every year if you plan on retiring in 40 years? Assume an 8% average return on this account and that it is empty today. Hint: Use TVM calculator $1,458 $3,860 $5,957 $8,444 $25,000arrow_forward
- Assume that you want to retire 30 years from now with an amount of money that will have the same value (purchasing power) as $3 million today. If you believe the inflation rate will average 4.8% per year, determine the amount of future dollars you will need. The amount of future dollars you will need is $ . (Enter your answer in dollars and not in millions of dollars.)arrow_forwardIn wisely planning for your retirement, you invest $35,000 per year for 20 years into a 401k tax-deferred account. Assume you make a real return of 10% per year when the inflation rate averages 3.4% per year. How many future dollars will you have in the account immediately after your last deposit? You will have $ 3788484. future dollars in your account immediately after your last deposit.arrow_forwardYou just had your 30th birthday and you are planning for your retirement at age 66. You currently have $20,000 in your investment portfolio, and you estimate that you will need at least $1.5 million in order to retire comfortably when you turn 66. What rate of return must be earned on your investment portfolio (assuming that you do not add any more money into the account) for your retirement plan to work? Show me all the calculation processarrow_forward
- Your client, Tom, has come to you inquiring about retirement. He wants to know approximately how much (in future dollars) he will need to have saved by retirement. You have calculated that he will need about $182,365 a year to maintain his current life style. He expects to retire at age 64 and live to around 90, and his return on investment averages at 9%. Estimated average inflation is 3%. How much does Tom need to have on day 1 of retirement to meet this goal? O $1,987,422 O $2,127,937 O $2,662,389 O $2,552,815arrow_forwardIn our prior example, you need to have about $4,000,000 in savings at the age of 60 to fund retirement withdrawals that start at $250,000 on your 61st birthday, grow at 3% (the assumed inflation rate), and last for 35 years (i.e., from 61 to 95). You are currently 30 years old and have received an inheritance from your rich aunt. You have no savings. As in the prior example, assume that you will earn 8% per year on your investments. How large does the inheritance need to be to completely fund your retirement plan, which requires savings of $4,000,000 on your 60th birthday? $400,000 $500,000 $700,000 $600,000 $800,000arrow_forwardIn planning for your retirement, you have decided that you would like to be able to withdraw $60,000 per year for a 10 year period. The first withdrawal will occur 20 years from today. a. What amount must you invest today if your return is 10% per year? b. What amount must you invest today if your return is 15% per year?arrow_forward
- Assume you are thinking of buying a house currently priced at $169,000. If housing prices rise at an annual inflation rate of 3%, estimate the purchase price of a similar house if you wait 4 years before committing yourself to buying one. Suppose when you are 52 years old, the yearly statement you get from the Social Security Administration estimates that your monthly payment at age 66 will be $620. If inflation stays constant at 2%, what will be the purchasing power of that $620? Calculate the effective annual rate for an investment that earns 7.1% interest compounded quarterly. Round to the nearest hundredth of a percent. What is the effective annual interest rate of an investment that pays 7.6% annual interest, compounded quarterly? Round to the nearest hundredth of a percentarrow_forwardAssume that Social Security promises you $40,000 per year starting when you retire 45 years from today (the first $40,000 will come 45 years from now). If your discount rate is 7%, compounded annually, and you plan to live for 20 years after retiring (so that you will get a total of 21 payments including the first one), what is the value today of Social Security's promise?arrow_forwardIn wisely planning for your retirement, you invest $12,000 per year for 20 years into a 401(k) account. How much can you withdraw each year for 10 years, starting one year after your last deposit, if you obtain a real return of 10% per year? Assume the inflation rate averages 2.8% per year.arrow_forward
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