Question - You plan to work for 30 years and then retire. You currently have $25,000 saved toward retirement and you plan to save 10% of your salary each year for the next thirty years. Your current salary is $55,000 salary year and you expect that salary to grow at about 5% per year. Inflation is expected to be 2% per year indefinitely. All of your savings (including the $25,000 saved and the money taken out of your savings) will be invested in a portfolio of stocks that is expected to pay a 10% annual return. At the time you retire, you plan to move your money into a safer portfolio that is expected to pay 8% per year. As an eternal optimist, you expect to live forever. Assume that you want your purchasing power to be the same each year during retirement and that you want to spend the maximum amount possible under the assumptions above.
a) How much money can you withdraw during the first year of retirement (in 31 years)?
b) What is the purchasing power of that withdrawal in today's dollars?