- Suppose that I want to have $700,000 in today’s dollars in my newly opened IRA when I retire in 36 years. Assume that
my investments earn 9.3% and that infl ation averages 3.5%.
a. What is the actual future value I need in order to achieve my goal?
b. How much should I deposit each year in order to reach this goal? Assume that I want to contribute the same
amount of actual dollars each year; I do not intend to increase the contributions to keep pace with infl ation.C. Financial Projections in Today’s Dollars
- Suppose that I want to have $700,000 in today’s dollars in my newly opened IRA when I retire in 36 years. Assume that
my investments earn 9.3% and that infl ation averages 3.5%
a. What is the real rate of return I am expecting on my investments.
b. How much should I deposit each year in order to reach this goal? Assume that I want the answer in today’s dollars;
I intend to increase my contributions each year to keep pace with infl ation.D. Projections with Payments Changing at a Different Rate than Infl ation
- Suppose that I want to have $700,000 in today’s dollars in my newly opened IRA when I retire in 36 years. Assume that
my investments earn 9.3%, that infl ation averages 3.5%, and that I expect to increase my deposits by 5% each year.
According to this plan, how much should I deposit this year.
E. Grab Bag
- What is the real rate of return on my investment account if infl ation runs at 3.15% and my account grows at
a 7.25% rate.
Questions 11–14 deal with Emily’s retirement savings plans.
Emily fi gures she needs $650,000 in her 401(k) account to retire comfortably 32 years from now. She realizes that it is not
$650,000 actual dollars that she wants, but rather $650,000 in today’s dollars.
Suppose that infl ation averages 3.25% annually in the future, and that Emily’s investments will earn an average 9.25% annual
rate of return. She has nothing in her 401(k) account today.
- Calculate the amount that Emily should deposit from each of her biweekly paychecks to reach this goal. Assume that
she plans to contribute the exact same dollar amount from each paycheck from now until retirement. - Calculate the amount that Emily should deposit from each of her biweekly paychecks to reach this goal. Assume that
she plans to increase her payments by 4.5% each year. - Calculate the amount that Emily should deposit from each of her biweekly paychecks to reach this goal. Assume that
she plans to increase her payments over the years to keep up with infl ation. - What real rate of return are we assuming for Emily’s retirement account?
328 Chapter 7 Retirement Plans