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Lev, Tax Preparer
Category: Finance
Satisfied Customers: 29535
Experience:  Personal Investment, Tax Preparation
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My father is 50 years old, and he plans to retire in 10 ...

Customer Question

My father is 50 years old, and he plans to retire in 10 years. He expects to live for 25 years after he retires (until he's 85). He wants a fixed retirement income that has the same purchasing power at the time he retires as \$40,000 has today. His retirement income will begin the day he retires, 10 years from today, and he will then get 24 additional annual payments. Inflation is expected to be 5 percent per year from today forward; he currently has 100,000 saved up. He expects to earn a return on his savings of 8 percent per year, annual compounding. To the nearest dollar, how much must he save during each of the next ten years (with deposits made at the end of each year) to meet his retirement goal?
Submitted: 9 years ago.
Category: Finance
Expert:  Lev replied 9 years ago.

Dear XXXXX,

Thank you for very interesting question!

here are some results

The first part is accumulated phase - you only add to saving and spend from other sources. The second phase - there will nt be any additional to saving - only interest and spending.

Spending is inflation adjusted (based on 5% inflation).

Additional also inflation adjusted - you would need to save \$49,925 annualy in this year and it will be \$77,450 in ten years from now.

You will have ~\$1,100,000 at the time of retirement. The maximum saving will be \$1,222,519 in 19 years and will start to go down because of spending increase (inflation adjusted). So far by the time your father plan to die his estate will be \$54.

Customer: replied 9 years ago.

When I put the figures in Excel, I got results similar to yours.

However, I am a little confused because the book I'm using lists the answer as: PMT= \$36,949.61.

Any suggestions?
Expert:  Lev replied 9 years ago.

Please find HERE the excel file I created - so you may compare with yours.

PMT(rate,nper,pv,fv,type) - is the financial function that used also in Excel - it calculates the payment for a loan based on constant payments and a constant interest rate.

• Rate is the interest rate for the loan.
• Nper is the total number of payments for the loan.
• Pv is the present value, or the total amount that a series of future payments is worth now; also known as the principal.
• Fv is the future value, or a cash balance you want to attain after the last payment is made. If fv is omitted, it is assumed to be 0 (zero), that is, the future value of a loan is 0.
• Type is the number 0 (zero) or 1 and indicates when payments are due.

However, in your situation - payments are not constant - but inflation adjusted. Is it possible that spending will not be inflation adjusted after he retired?

Customer: replied 9 years ago.
I suppose that it's possible spending will not be inflation-adjusted after retirement, but, in that case, would the payments be lowered this significantly (from 49,000 to 36,000)? Thank you again for your help.
Expert:  Lev replied 9 years ago.

providing that spending will not be inflation-adjusted after retirement - and payments will not be inflation-adjusted - that amount will be \$33,109.

Customer: replied 9 years ago.