Question
You are saving for two goals: one is to fund a child's college education, the other is to retire. Assumption : You estimate an 8%
You are saving for two goals: one is to fund a child's college education, the other is to retire. Assumption: You estimate an 8% expected return on all investments over all the periods of saving and retirement.
The child will begin college in exactly 18 years, and you will retire on the same day. Average college costs for local state institutions are currently running $6,500 per year, and are expected to increase at a rate of 3% per year. You will set this money away in a college trust fund for your child. Q1. How much will you need in 18 years to fund the college trust fund for the tuition for the four years?
You estimate a 20-year retirement, during which time you would like to pay yourself a $65,000 per year salary (first payment occurs at the end of year 18, assume no inflation here). You have saved nothing so far. Because you bought them a college education, assume your children support you after you run out of money. Q2. How much do you need in 18 years to fund your 20-year retirement? How much would you save as an annual payment to reach your retirement goal?
Also, on the day you retire, you would like to pay cash for an adventure motorcycle to tour around the world. These machines currently cost $21,000 and are expected to increase in value at a rate of 2% per year. Q3. How much do you need in 18 years to fund your adventure motorcycle?
Next, You will save annually beginning in exactly one year18 equal payments spread over time. The date of your last savings installment coincides with the first tuition payment.
Q4. How much do you have to save each year to accomplish all of the above goals Q1, Q2, Q3?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started