Question:
You are currently 27 years old and plan on retiring at age 67. Based on current life tables and family history, you anticipate living another 23 years after retirement (morbid but important to consider). You estimate that you will need $157,212 per year in retirement and can earn 5% per annum on your investments.
1. How much money do you need today assuming that you will live on your last year of income in the first year of retirement and then draw down your nest egg at the start of the second year (equivalently, the end of the first year)?
2. Assuming you do not currently have any savings, how much do you have to save each year during your working years to ensure that you will have enough for your retirement?
3. Recognizing the importance of inflation, you realize that while you will need $157,212 in your first year of retirement, this need will grow at approximately 2% per year. Recalculate your annual savings during your working years to meet this increased retirement burden assuming you do not have any savings today?
4. How would your answer to the previous question (Retirement 4) change if you could increase your savings by 2% per year to coincide with expected salary raises? Specifically, how much would you have to save your first year