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D. A worker is currently making 50,000 per year, and this will increase at a rate of 2% per year for the next 30 years.
D. A worker is currently making 50,000 per year, and this will increase at a rate of 2% per year for the next 30 years. Explicitly, between year 0 and year 1, they earn 50,000, between 1 and 2, they earn 50,000 (1.02), between 2 and 3, it is 50,000 (1.02)2, etc. At the end of each year, the worker invests It, and this earns 7% per year. At the end of year 30, the worker will retire, and will live off of their savings, plus social security payments of 2,500/month for the following 20 years. 3. If they have investments/savings worth S at year 30, the sav- ings are still invested at a rate of return of 7% per year, what constant rate of withdrawal can they afford for 20 years? To put it another way, what sequence of withdrawals of w at t = 1,t = 2, ...,t = 20 have NPV equal to S using an in- terest rate of 7%? [Hint: the answer is about one tenth of S per year for the 20 years.] D. A worker is currently making 50,000 per year, and this will increase at a rate of 2% per year for the next 30 years. Explicitly, between year 0 and year 1, they earn 50,000, between 1 and 2, they earn 50,000 (1.02), between 2 and 3, it is 50,000 (1.02)2, etc. At the end of each year, the worker invests It, and this earns 7% per year. At the end of year 30, the worker will retire, and will live off of their savings, plus social security payments of 2,500/month for the following 20 years. 3. If they have investments/savings worth S at year 30, the sav- ings are still invested at a rate of return of 7% per year, what constant rate of withdrawal can they afford for 20 years? To put it another way, what sequence of withdrawals of w at t = 1,t = 2, ...,t = 20 have NPV equal to S using an in- terest rate of 7%? [Hint: the answer is about one tenth of S per year for the 20 years.]
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