B H J 12 D E F G 1 1 As of the end of the year in 2009, Travis and Alison have a joint investment account with $400,000 in assets. 2 They are 40 years old and their household income is about $200,000 per annum. Their current consumption 3 expenditures amount to $100,000 per annum. They are planning for a retirement lifestyle that is consistent 4 with their current living standard and they are targeting for 20 years of such retirement living. That is, they 5 wish to save enough money so that they can maintain their current level of consumption for 20 years after 6 retirement. The inflation rate is expected to be 4 percent per annum and the return on investment is 10%. 7 Travis and Alison will work for another 15 years before they retire. How much do they need to contribute to 8 their retirement savings to achieve the goal? {For ease of calculation we shall assume all payments to occur at 9 the end of the period. The only exception is the $400,000 assets Travis and Alison have in the joint 10 investment account today.} 11 12 1) Solve the problem using the constant-dollar approach. That is, use real values and real return for the 13 problem. 14 2) Solve the problem using the nominal-dollar approach. 15 16 17 18 Constant dollar in this problem is 2009 Answer already provided. This indicates that we are solving the problem using 2009 constant dollar. 19 20 Assets $400,000 21 Nominal Return per annum 10% 22 Inflation per annum 4% 23 Real return per annum 5.77% Yellow indicate cells that require formula. 24 Expenditure (t=0) $101,000 You must finish these cells before moving to the model below. 25 Constant $ Target at retirement $1,180,480.67 26 Annual deposit in constant $ $11,048.50 27 28 Step 1: Finish this before moving to Step 2 Step 2: Finish this after completing Step 1 29 Accumulation Phase - Constant Dollar Approach as of 2009 Accumulation Phase - Nominal Dollar Approach 30 Year BEG Balance Deposit (Year End) Ending Balance Year BEG Balance Deposit (Year End) Ending Balance 31 1 $400,000 $11,048.50 $434,125.42 1 $400,000 $11,490.44 $451,490.44 45 15 $1,105,644.96 $11,048.50 $1,180,480.67 15 $1,914,619.34 $19,897.72 $2,125,979.00 46 Withdrawal Phase - Constant Dollar Approach 2009 Withdrawal Phase - Nominal Dollar Approach 47 BEG Balance Withdrwal (Year End) Ending Balance 16 $1,180,480.67 ($101,000) $1,147,585.33 16 $2,125,979.00 ($189,171) $2,149,405.79 49 17 $1,147,585.33 ($101,000) $1,112,792.17 17 $2.149,405.79 ($196,738) $2,167,608.42 65 33 $271,131.05 ($101,000) $185,773.22 33 $951,143.64 ($368,486) $677,771.52 66 34 $185,773.22 ($101,000) $95,490.91 34 $677,771.52 ($383,226) $362,322.72 67 35 $95,490.91 ($101,000) ($0.00) 35 $362,322.72 ($398,555) $0.00 68 Questions: 69 If they don't die before age 75 they will be in trouble unless SS kicks in to help. 70 They cannot have typical problems associated with health and age. 71 There is nothing to pass on. They come with nothing and leave with nothing. 72 Note: You do not need to provide answers to these questions. + 48 + 73