## (Solved) Your 25 year old client wants to retire when he is 65 years old, and have a retirement income equivalent to \$4,000 per month in today's dollars.

YourÂ 25Â year old client wants to retire whenÂ heÂ isÂ 65Â years old, and have a retirement income equivalent toÂ \$4,000Â per month in todayâ€™s dollars.Â 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,Â heÂ will need substantially higher retirement monthly income to maintain the same purchasing power.Â HeÂ plans to purchase a lifetime annuity from an insurance company one month beforeÂ heÂ retires, where the retirement annuity will begin inÂ exactly 40 years (480 months).Â The insurance company will addÂ a 3.00 percent premium to the pure premium cost of the purchase price of the annuity. The pure premium is actuarial cost ofÂ hisÂ anticipated lifetime annuity.Â HeÂ hasÂ just learned the concept of time value of money and never saved anything earlier. HeÂ will make the first paymentÂ in aÂ monthÂ from nowÂ and the last payment one month beforeÂ heÂ retires (a total of 479Â monthly payments).

Given a rate of return ofÂ 5%Â for the foreseeable future, how much doesÂ heÂ need toÂ save each month until the monthÂ beforeÂ heÂ retires?

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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This question was answered on: Sep 05, 2019

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