Today is New Years Eve (December 31, 2009) and Lisa made a new year's resolution to save for her retirement, which would be at the end of 20 years from now.
She plans to invest a fixed portion of her annual income in her retirement account at the end of every year. The first payment will be made at the end of next year (December 31, 2010) and the last payment will be made at the end of twenty years from now (total twenty payments).
Her income for the year 2010 is $120,000 and is expected to increase by 2.5% every year. In addition to these annual payments she will make a lump sum payment of $20,000 at the end of the fifth year.
She wants to be able to withdraw $50,000 at the end of every year from this account after her retirement for 15 years. The first withdrawal will be made at the end of 21 years.
What proportion of her salary should she invest every year in order to meet her retirement goals if the account pays 7% interest per year?