Question
I would appreciate a breakdown of how to solve this problem: Erik is today 33. During the last year, Erik earned 50,000 after tax measured
I would appreciate a breakdown of how to solve this problem:
Erik is today 33. During the last year, Erik earned 50,000 after tax measured at the current price level. Currently, he has not any savings. Therefore, he decides to save a constant proportion of his future annual salaries after tax measured at the current price level until he retires on his 70th birthday. Erik expects his future salaries after tax measured at the current price level to increase by 0.25 percent annually. Erik expects to be able to get an annual 0.5 percent real return after tax on his savings. He decides to have 650,000 saved measured at the current price level when he retires. However, Erik is not able to calculate what constant proportion of his future annual salaries that need to be saved. Solve Erik's problem.
What I have done is to calculate the needed annual savings using growing annuity formula and getting 18458.4143 annual savings from salary. But I don't know how to go from here. Total earnings I get 4,001,005.93. I tried summing total savings and dividing this number by total earnings to get the constant proportion but it is wrong. Thank you!
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