Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he...

Question:

Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until is 85 years old. He wants a fixed retirement income that has the same purchasing power at the time he retires at $40,000 has today. (The real value of his retirement income will decline annually after her retires.) his retirement income will begin the day he retires, 10 years from today, after which time he will receive 24 additional annual payments. Annual inflation is expected to be 4.5%. He currently has $115,000 saved, and he expects to earn 7.2% annually on his savings.

How much must he save during each of the next 10 years (end of year deposits) to meet his retirement goal?

Real and Nominal Interest rate:

Real interest rate shows the interest rate of an invested that is adjusted by the inflation.In other words, it shows the true rate of loans and bonds.

Nominal interest rate = real interest rate + inflation rate

For example, If the rate of inflation is at 1%, and the real interest rate is 10%, then the nominal interest rate would be 9%.

Answer and Explanation: 1

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Phase II: Retirement Phase

Considering the inflation rate @4.5% , the expected retirement income at year 1 {eq}= $40,000*1.045^ {10} = $...

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Real Interest Rate: Definition & Calculation

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Chapter 25 / Lesson 5
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What is real interest rate? Understand the definition of real interest rate. Learn the formula of real interest rate and how to calculate real interest rate.


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