Question 5 (22 marks)

Victor is spending HKD300,000 per year and is quite satisfied with the present living lifestyle and standard. He is now 38 and plans to retire at the age of 60. He believes he can live up to the age of 85. He wants to keep 80% of the current living lifestyle and standard for the first 15 years after retirement. However, in view of the rising healthcare costs for elderly, he wants to increase the annual expenditure to 120% of the current living standard for the remaining 10 years (that is 50% more as compared to the first 15 years). Victor would like the retirement money for spending in a year to be ready at the beginning of every year. He plans to start saving for the retirement reserve with an equity unit trust fund of 10% annual rate of return. However, to lower the risk after retirement, he will choose a bond fund with an annual rate of return of 6% when he retires.

Assume the average long term inflation is 4% p.a.

a. What is the required annual expenditure at the time when Victor retires at the age of 60? (2 marks)

b. What is the required annual expenditure at the time when Victor reaches the age of 75? (2 marks)

c. What is the amount of money required for the first 15 years after Victors retirement? (at the beginning of age 60) (5 marks)

d. What is the amount of money required for the remaining 10 years of Victors his retirement? (at the beginning of age 75) (5 marks)

e. What is the total amount of money required at the time when Victor retires at the age of 60? (at the beginning of age 60) (3 marks)

f. How much should Victor save at the beginning of each year from now on until the age of 60 in order to meet the required amount at (e)? (5 marks)

How to calculate a)-f)?