5. Saving for Retirement. Suppose you are a 25-year-old employee earning $35,000 per year salary. You plan to retire in 40 years at age 65. Assume that the Central Bank is successful at maintaining inflation at its target rate of 2% over the next 40 years and also assume that your salary not only keeps up with inflation, but you also advance in your career, receiving salary increases resulting from your greater experience level (and presumed higher productivity). Therefore, suppose your salary increases at 3% per year = inflation rate + a real growth of 1% per year. In 2057, your expected salary is = Po(1+i)n = (35,000)(1+i)40 = _____________. [Use Table A-3, assuming n = 40 and i = 3%.] You expect to retire in 2057 at age 65. Financial advisors indicate that you will need about 80% of your salary at retirement in order to live at about the same standard of living. Therefore, you want to have how much available in your first year of retirement? Amount needed in first year of retirement = (0.8)$____________ (your salary at retirement calculated in problem above) = $________________. Suppose you anticipate an annual retirement income (e.g., perhaps Social Security or other defined benefit retirement plan) of $60,000 in 2057 [i.e., the present Social Security retirement indexed to inflation, but also assuming retirement plans are struggling to meet financial commitments]. Your personal savings must cover the shortfall of $_______________. Based on long-term stock/bond market returns, financial advisors suggest that a safe withdrawal rate from ones retirement nest egg [to avoid depleting the nest egg prematurely] is about 4%. Thus, if a 4% withdrawal rate = $____________ (shortfall from above), you need (25)($___________) = $______________ nest egg at retirement to sustain your retirement. Given that you need a total nest egg of $_______________ in 2057, how much do you need to save annually to achieve this goal? Assume a diversified portfolio of stocks and bonds generates a CAGR of 7%. Use Annuity Table A-4, assuming n = 40 and i = 7%. My target savings rate per year = $_________________/(factor in Annuity Table) = $________________, or $_________ per month.