Reference no: EM13940338
Focusing solely on savings, create an example to see how much money that will provide in retirement. There are two ways to do this: using "actual" dollars or "today's" dollars. Using actual dollars and nominal investement and savings rates is fine, but such an analysis might show that you can have a large amount of savings in retirement in nominal terms but in "real" after inflation terms it is really not that much at all.
I prefer using "today's". That way the results are easier to interpret and the only thing you need to change is to ensure your investment rate is a "real" rate - subtracting out inflation. So if you think you can get a nominal rate of return of 6% on your retirement savings over, say, thirty years, you might only get 2% after inflation.ere is an example of retirement.
Task: Provided is a simple example below and also on the attached worksheet that shows how much savings will accumulate to as of the retirement date and how much that nest egg could provide as an annuity over a person's remaining life. PROVIDE your own or hypothetical example and see what you get. Use the excel worksheet provided (an attach it) or a financial calculator or use formulas. Summarize your results
Example:
A person makes a stable income of $100,000/year every year and saves 10% ($10,000/year) which is invested at a real (after inflation) rate of 3% in order to retire in 30 years. At retirement time will have a nest egg of about $475K. (FV = ? PV = 0, PMT = -10K, I/Y = 3, n=30 or =FV(3,30,-10K)
If this person wants the money to last 30 additional years (retirement period), he/she can withdraw a maximum of $28K annually (PMT = ?, PV = $475K (or $560K), n=30, fv = 0 and I/Y = 3 or =PMT(3,30,
On the attachment is an EXCEL worksheet showing a different example. Make up your own. Discuss the results.
Here it is using EXCEL: If you save $A per year for N years and earn I interest (in decimals) or return on your money you will have accumulated =FV(I, N,A)
Then if you want to see the maximum fixed amount you can withdraw each year for N years given the FV amount above and earning I return on your money, the amount is =PMT(I,N,0,FV).
Of course in both calculations either FV or the other amount must be negative, but you can interpret the result correctly.
Attachment:- Retirement example.rar
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