John Adams is the CEO of a nursing home in San Jose. He is now 50 years old and plans to retire in ten
years. He expects to live for 25 years after he retiresthat is, until he is 85. He wants a fixed retirement
income that has the same purchasing power at the time he retires as $40,000 has today (he realizes that
the real value of his retirement income will decline year by year after he retires). His retirement income
will begin the day he retires, ten years from today, and he will then get 24 additional annual payments.
Inflation is expected to be 5 percent per year for ten years (ignore inflation after John retires); he
currently has $100,000 saved up; and he expects to earn a return on his savings of 8 percent per year,
annual compounding. To the nearest dollar, how much must he save during each of the next ten years
(with deposits being made at the end of each year) to meet his retirement goal? (Hint: The inflation rate
5 percent per year is used only to calculate desired retirement income.)
ANSWER
Annual inflation rate				5%
Annual interest rate				8%
Years until retirement				10
Years of life after retirement				25
Desired retirement income in today's dollars				$40,000
Desired retirement income 10 years from today
PV of desired retirement income (annuity due) 10 years from today
Current savings				$100,000
FV of current savings 10 years from today
Amount needed 10 years from today
Annual amount to be saved