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Kent Hickman, who is going into retirement, has $180,000 in savings in an investment portfolio, which earns 9% nominal interest, or $16,200 of earned interest
Kent Hickman, who is going into retirement, has $180,000 in savings in an investment portfolio, which earns 9% nominal interest, or $16,200 of earned interest per year. He also has a savings account with $12,000, earning a 5% nominal interest. He wants to keep this savings account in real terms in case of an emergency. His home mortgage is paid off, and in addition, he will receive $9,000 per year in real terms for the rest of his life from Social Security. His basic living expenses come out to $1,500 per month, and he plans to spend another $500 per month on hobbies and travel, making his total expenses come out to $24,000 per year in real terms. Dr. Hickman believes he will live for another 20 years. Inflation is 4%. Nominal interest rates to real interest rates: Nominal Rates Calculation Real Rates of Return Investment Portfolio: 9% (1+.09) 4.81% (1+.04) Savings Account: 5% (1+.05 .96% (1+.04) Income (per year in real terms): Income Income from Income from investment portfolio Total per year from SS savings account income $ 12,000 * .96% 1 0481 $ 180,000= PMT L 0481 (1+.0481)20 ) $9,000 = $115.20 = $14,211.89 $23,327.09
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