Suppose you expect to rent a house when you retire in 35 years. Today, rent for a 3 bedroom, 2 bathroom home costs $36,000 per year. You expect inflation to be 2% per year between now and when you die and that rent will adjust every year with inflation. Assume rent is paid at the beginning of the year and that you earn a return of 6% on savings.
a) How much will rent cost in your first year of retirement if you want to rent a 3 bedroom and 2 bathroom home?
b) How much will you need to have saved by the time you retire in order to pay for rent for the entire time you are retired? (Assume you expect to live for 30 years after retiring and won't save any more money in that time)
c) If you make $125,000 per year after tax while working, what percentage of your after tax income do you need to save every year to be able to afford the home from above