Question
Mykola is 30 years old and plans to retire at age 70. He wants to have enough retirement earnings to last until age 100 (several
Mykola is 30 years old and plans to retire at age 70. He wants to have enough retirement earnings to last until age 100 (several of his relatives have lived to be over 100 years old!)
Mykola is frugal and intends to continue to grow his garden, utilize recycled and reused furniture and clothing, and anticipates needing an annual income of only $40,000 after tax in today's dollars, during retirement.
He has provided the following data:
Investments weighted average, nominal return (before inflation) during retirement | 5% |
Investments weighted average, nominal return (before inflation) before retirement | 8.6% |
Average annual inflation rate | 3% |
Average tax rate (ATR) after retirement estimate | 22% |
Desired after-tax income at retirement | $45,000 |
Annual amount of CPP expected during retirement years (before-tax) | $12,000 |
Employer pension (before-tax) | $25,000 |
- Use the simplified real rate of return, not the Fisher effect, for simplicity.
- Assume pension benefits will be received at the beginning of the year.
Using the goal-based approach, find the amount that Lou should invest annually to cover the shortfall from his other pension income.
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