K L M N O 7.99% 121,000 You have decided that you want to build enough retirement wealth that, if invested at 7.99% per year, will provide you with $121000 of income for 33 years of retirement. Unfortunately, you believe that inflation is 3.18% per vear from now until you retire in 26 years. That means that if you want to have the same buying power in the future, you will need what is currently 5121000 a year, but grown to keep up with inflation. 3.18% Assumptions Investment Rate of Return Desired Retirement Income (Uninflated) Retirement Length Inflation Rate Savings as of Today 7 Time Until Retire 8 House Price 9 Down Payment 10 Interest Rate on Mortgage 11 30 Year Mortgage # of Months 12 Annual Growth In Home Sales 106,000 To date, you have saved $106000, but you still have 26 years until you retire. You believe that you can earn 7.99% on your investments until you retire, and during your retirement. You are thinking of buying a house as well. However, if you buy a house, the down payment will come out of your savines 170,000 20.00% 5.63% 350 3.09% Scenario 1: You do not use your savings to pay the down payment on a house in this case you rent until retirement. Assume that rent is equal to the morte ee payment mortezee insurance, so you don't save more annually by rentine. The only differences in the initial amount you have as savines Scenarlo 2: You use your savings for the down payment on a house. While that reduces your initial savines you will be able to sell the house when you plan on retiring The price you can sell the house for will be the price you paid for it, grown by the annual growth in home price (3.09%) every year until you retire. In both scenarias, how much more maney da you need to contribute each year to reach you goals, with the inflation expectation over the next 26 years? You will take your first payment the day you retire, and will make your first annual savings deposit tamarrow, since you'll know how much you need to save each year to reach your gaal. After you retire, you do not have to consider inflation rate.. you do not need to calculate a growing annuity). You should calculate: Future Value of Desired Retirement Income Future Value of Current Savings with no Down Payment Future Value of current savings with down payment The Future Value of the house, given the increase in house price rate Present Value of the retirement income payments you want (hint: annuity due The amount you need to save to receive the desired annual retirement payment for the duration af retirement Calculate the Difference Between the required swings, and the future value of the current savings (scenaria 1), or the difference between required savings and house+ current savings scenario 2) Calculate the amount you need to save each year for both scenarios (hint: annuity due) Finally, which option should you choose, buy a house or rent, and why? K L M N O 7.99% 121,000 You have decided that you want to build enough retirement wealth that, if invested at 7.99% per year, will provide you with $121000 of income for 33 years of retirement. Unfortunately, you believe that inflation is 3.18% per vear from now until you retire in 26 years. That means that if you want to have the same buying power in the future, you will need what is currently 5121000 a year, but grown to keep up with inflation. 3.18% Assumptions Investment Rate of Return Desired Retirement Income (Uninflated) Retirement Length Inflation Rate Savings as of Today 7 Time Until Retire 8 House Price 9 Down Payment 10 Interest Rate on Mortgage 11 30 Year Mortgage # of Months 12 Annual Growth In Home Sales 106,000 To date, you have saved $106000, but you still have 26 years until you retire. You believe that you can earn 7.99% on your investments until you retire, and during your retirement. You are thinking of buying a house as well. However, if you buy a house, the down payment will come out of your savines 170,000 20.00% 5.63% 350 3.09% Scenario 1: You do not use your savings to pay the down payment on a house in this case you rent until retirement. Assume that rent is equal to the morte ee payment mortezee insurance, so you don't save more annually by rentine. The only differences in the initial amount you have as savines Scenarlo 2: You use your savings for the down payment on a house. While that reduces your initial savines you will be able to sell the house when you plan on retiring The price you can sell the house for will be the price you paid for it, grown by the annual growth in home price (3.09%) every year until you retire. In both scenarias, how much more maney da you need to contribute each year to reach you goals, with the inflation expectation over the next 26 years? You will take your first payment the day you retire, and will make your first annual savings deposit tamarrow, since you'll know how much you need to save each year to reach your gaal. After you retire, you do not have to consider inflation rate.. you do not need to calculate a growing annuity). You should calculate: Future Value of Desired Retirement Income Future Value of Current Savings with no Down Payment Future Value of current savings with down payment The Future Value of the house, given the increase in house price rate Present Value of the retirement income payments you want (hint: annuity due The amount you need to save to receive the desired annual retirement payment for the duration af retirement Calculate the Difference Between the required swings, and the future value of the current savings (scenaria 1), or the difference between required savings and house+ current savings scenario 2) Calculate the amount you need to save each year for both scenarios (hint: annuity due) Finally, which option should you choose, buy a house or rent, and why