311.3
You want to have an income of $100,000 per year for 20 years when you retire. If you are 25 now, how much do you have to invest per year to reach your retirement goal? Assume that you will make your first deposit one year from now when you turn 26 and you will continue until you turn 65. You will withdraw your first $100,000 cash flow when you turn 66. Assume an interest rate of 12% per year throughout this problem. (2pts)
This is a tough question and is very difficult to answer without drawing a timeline.
Year 25 |
26 |
… |
65 |
66 |
… |
85 |
CF |
… |
CF |
100,000 |
… |
100,000 |
There are 2 annuities here. The first one is the one where you are making deposits for the next 40 years. The second annuity occurs when you start making withdrawals. In order to figure out the necessary deposits for the first annuity, we must first value the second one.
