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Your friend is celebrating her 30 th birthday today and wants to start saving for her anticipated retirement at age 65. She estimates that the

Your friend is celebrating her 30th birthday today and wants to start saving for her anticipated retirement at age 65.

  • She estimates that the annual spending needs would be $280,000 based on the current price level, and inflation rate is expected to be 2.5% + (0.1% x 8) per year.
  • She wants to be able to make withdrawal for spending needs on each year for 24 years following her retirement; the first withdrawal will be on her 66th birthday.
  • In the year that she make her last withdrawal, she also want to be able to withdraw $3,800,000 as an inheritance for her children.
  • Your friend intends to invest her money in a conservative fund, which offers 5% + (0.1% x 8) interest per year after retirement.
  • Before retirement, your friend invests in stock funds, which offers 8% interest per year.
  • Your friends employer provides pension benefit to your friend, which pays fixed amount of $500,000 annually to your friend for 24 years, since 66th birthday.
  • In addition, your friend expects to spend $100,000 for wedding on her 35th birthday.
  • She will get $390,000 annual salary in 31st birthday, and the salary is expected to be increase at 3%. The last salary will be paid on her 65th birthday.
  • If she starts making these deposits on her 31st birthday. What proportion of salary should her save each year?
  1. Expected annual consumption need on 66th birthday. (2 marks)
  2. Present value of all consumption need on her 65th birthday. (2 marks)
  3. Present value of the inheritance on 65th birthday. (2 marks)
  4. Present value of the pension benefits on 65th birthday. (2 marks)
  5. Future value of the wedding expenses on 65th birthday. (2 marks)
  6. Total amount needed on 65th birthday. (2 marks)
  7. Annual saving need as a percentage of her salary. (3 marks)

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