Question
1a. You want to have $3 million in your retirement account in 40 years, when you expect to retire. You will put away an equal
1a. You want to have $3 million in your retirement account in 40 years, when you expect to retire. You will put away an equal amount, at the end of each year, starting one year from now, that you expect to grow to the $3 million by year 40. If you believe you can invest at 10% per year for the next 40 years, what is the size of the equal annual payment you will have to make?
1b. In the previous problem, you wanted to have $3 million available when you started your retirement in 40 years. But you are worried about inflation. Suppose that you want to have what $3 million will buy in today's purchasing power (i.e., you want the "real" value of the account to be $3 million in forty years). Assuming the 10% interest rate is a nominal rate and the expected inflation rate over the forty years is 3%, how much money (nominal) must be in the account at the end of forty years?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started