Jon, 20, is about to begin his career as a rocket scientist for a NASA contractor. Having recently read an article on Social Security in the Wall Street Journal he is concerned that the Social Security Trust Fund will be exhausted by 2032 and decides he should not rely on Social Security to fund his retirement.
His retirement plan pays 9 percent annual interest and allows him to make equal yearly contributions. Jon plans to retire at the age of 65 and will withdraw the entire amount of his retirement account at that time. He would like to purchase a houseboat to live in. The boat currently sells for $287,500.
Annual inflation for luxury yachts is expected to be 1 percent. Jon plans to purchase the boat and place the remaining amount into an account paying 6% interest from which he will withdraw a yearly income of $150,000 per year. Based on family history, Jon expects to live until the age of 90. Assume Jon will make his first contribution one year from today and his last on the day he retires.
1. How much will Jon need at retirement to pay for the houseboat and to provide his desired yearly income of $150,000/year? Round to the nearest whole dollar.
2. How much will Jon need to contribute each year to his retirement fund to reach his goals? Round to the nearest whole dollar.