You are planning for a very early retirement. You would like to retire at age 40 and have enough money saved to be able to draw $205,000 per year for the next 30 years (based on family history, you think you’ll live to age 70). You plan to save for retirement by making 10 equal annual installments (from age 30 to age 40) into a fairly risky investment fund that you expect will earn 10% per year. You will leave the money in this fund until it is completely depleted when you are 70 years old. To see if your plan will work, answer the following questions:
1. How much money must you accumulate by retirement?
2. How does this amount compare to the total amount you will draw out of the investment during retirement? How can these numbers be so different?
3. How much must you pay into the investment each year for the first ten years?
4. How does the total out-of-pocket savings compare to the investment’s value at the end of the 10-year savings period and the withdrawals you will make during retirement?