(a)
To determine:
The annual needs of G in today’s dollars.
Introduction:
Annual needs means the amounts needs to spent on current expenses of the individual. An individual not only think for the present need but also consider the future needs and that is the reason they invest amount in retirement plans.
Explanation of Solution
Given,
Current salary is $50,000.
The formula to calculate annual needs is,
Substitute $50,000 for current salary in the above formula.
The annual need is $45,000.
Thus, the annual needs of G after retirement are $45,000.
(b)
To determine:
The annual requirement of G in today’s dollars with the effect of taxes
Explanation of Solution
Given,
Annual need is $45,000 as calculated in part a.
Average tax rate is 14% at the time of retirement.
The formula to calculate the annual requirement is,
Substitute $45,000 for annual needs and tax rate is 14% in the above formula.
Thus, the annual requirement after adjusting for tax is $52,325.58.
(c)
To determine:
The annual requirement of G in future dollars with the effect of inflation.
Explanation of Solution
Given,
The annual requirement after adjusting for tax is $52,325.58 as calculated in part b.
The retirement of G is in 40 years
The inflation rate is 3%
The formula to calculate the annual requirement is,
Substitute $52,325.58 for annual need after taxes and inflation rate is 3% in the above formula.
Thus, the annual need after adjusting for inflation is $170,686.04.
(d)
To determine:
The total requirement if the age of retirement of G is 20 years.
Explanation of Solution
Given,
The annual need after adjusting for inflation is $170,686.04 as calculated in part c.
The retirement of G is in 20 years
The inflation adjusted
The
The formula to calculate total requirement is,
Substitute $170,686.04 for annual needs and 12.46 for PVIFA in the above formula.
Thus, the total requires amount needed for retirement is $2,126,748.05.
(e)
To determine:
The total amount of monthly saving done by G.
Explanation of Solution
Given,
Total requirement as calculated in part d is $2,126,748.05
The
The formula to calculate monthly saving is,
Substitute $2,126,748.05 for total needs and 295.02 for FVIFA in the above formula.
Thus, G must save $600.74 monthly to meet his retirement needs.
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Chapter 15 Solutions
Personal Finance (8th Edition) (What's New in Finance)
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