Every year, you receive your entire annual salary at the end of the year. This year, your end-of-year salary will be K50,000 (in nominal terms). In real terms, you expect your salary to increase at a rate of 2% per year in the future. You have decided to start saving for retirement by putting money in a savings account. You plan to retire in 35 years, and you expect to live for 25 years after that. You assess that a reasonable lifestyle during those 25 years will require you to have, at the end of every year, a disposable income of K25,000 in real terms (i.e. the same purchasing power as K25,000 today). The nominal interest rate on your savings account is 8%, and it is expected to stay at that rate forever. The real interest rate is also expected to stay at its current level of 3.5%.

a. What is the inflation rate?

b. How much money (in nominal terms) will you need to have in your savings account when you retire, in 35 years (end of year 35), in order to be able to enjoy the lifestyle that you find reasonable?

c. Suppose that you will start saving for retirement at the end of the current year and you plan to make 35 deposits (one at the end of every year). All deposits are a fixed fraction x of your salary. Find the fraction x that will allow you to reach your reasonable lifestyle objective.