Suppose that Jim goes to work at age 25, earns on average $40,000 a year for 40 years. He inherits $320,000 when he starts working. He expects to live to be 75.
(a) Calculate on average how much Jim consumes per year, the ratio of his annual consumption to annual income, and his annual savings rate.
(b) Suppose now that Jim learns that he can expect to live to be 85. If Jim does not change his retirement age, compute Jim’s new annual consumption, as well as the new ratio of annual consumption to annual income, and his new annual saving rate.