Question
Your25year old client wants to retire whenheis65years old, and have a retirement income equivalent to$4,000per month in todays dollars.We cannot be sure of how long
Your25year old client wants to retire whenheis65years old, and have a retirement income equivalent to$4,000per month in todays dollars.We cannot be sure of how long we live after retirement, but the client wants to be extra careful and save for 25 years of after retirement life. Market expectation for average annual inflation for the future is 1.7%. Because of inflation,hewill need substantially higher retirement monthly income to maintain the same purchasing power.Heplans to purchase a lifetime annuity from an insurance company one month beforeheretires, where the retirement annuity will begin inexactly 40 years (480 months).The insurance company will adda 3.00 percent premium to the pure premium cost of the purchase price of the annuity. The pure premium is actuarial cost ofhisanticipated lifetime annuity.Hehasjust learned the concept of time value of money and never saved anything earlier. Hewill make the first paymentin amonthfrom nowand the last payment one month beforeheretires (a total of 479monthly payments).
Given a rate of return of5%for the foreseeable future, how much doesheneed tosave each month until the monthbeforeheretires?
If he decides to save $200 more every month instead, how much can he receive as the first month retirement income?
Are there any non-quantifiable factors that he should be aware of?
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