SHLEY GRA 9/1/2014 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 4 -Time Value Analysits Mini-Case in ten John Adams is the CEO of a nursing home in San Jose. He is now 50 years old and plans to retire years. He expects to live for 25 years after he retires-that is, until he is 85. He wants a fixed retirement 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 vears (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 in flation rate 5 percent per year is used only to calculate desired retirement income.) ANSWER Annual inflation rate Annual interest rate Years until retirement Years of life after retirement Desired retirement income in today's dollars Desired retirement income 10 years from today PV of desired retirement income (annuity due) Current savings FV of current savings Amount needed 10 years from today 5% 8% 10 S40,000 S100,000 Annual amount to be saved John Adams must save $36,950 per year during each of the next ten years in order to meet his retirement goal