Your father,who is 60,plans to retire in 2 years,and he expects to live independently for 3 years.He wants a retirement income which has,in the first year,the same purchasing power as $40,000 has today.However,his retirement income will be of a fixed amount,so his real income will decline over time.His retirement income will start the day he retires,2 years from today,and he will receive a total of 3 retirement payments.Inflation is expected to be constant at 5 percent.Your father has $100,000 in savings now,and he can earn 8 percent on savings now and in the future.How much must he save each year,starting today,to meet his retirement goals?
A) $1,863
B) $2,034
C) $2,716
D) $5,350
E) $6,102

Question

Quizplus · Accepted Answer

To calculate how much your father needs to save each year, we first need to determine the present value of the retirement income he desires. The first payment should have the purchasing power of $40,000 today, which means it will be $40,000 * (1.05)^2 = $44,100 in two years. The second and third payments will be $44,100 each, but their present value needs to be calculated using the 8% interest rate. The present value of these payments is then subtracted from his current savings, and the remaining amount is divided by the annuity factor for the savings period to find the annual savings required. The correct calculation leads to approximately $2,716.

Your Father,who Is 60,plans to Retire in 2 Years,and He