Question: Assume at age 25 you want to start saving for retirement. At that time you figured that you wanted to work until age 55 and will live another 25 years in retirement. At today’s cost you assume that you will need $3,000 a month to maintain your current lifestyle. You assume that inflation will increase that cost at an annual rate of about 4% until you withdraw your first retirement payment at t=21, after which your retirement withdrawals will remain fixed and that you can earn a 10% return on your investments.

1. How much do you estimate you will need at the time of retirement in your retirement account (i.e. at t=30 when you are 55)?
2. How much will you need to save each month from age 25 to retirement (a 30 year period) to accomplish that goal?
3. At age 40, after you have saved for 15 years, the U.S. experiences a financial downturn and your account value at that date falls 40%. (Hope this doesn’t hit home too hard for some of you with the current situation!) Assume that beyond that point you decide to invest in more moderate risk securities such that you will now only expect an 8% return. How much more will you need to save each month over the next 15 years to still accomplish your retirement goal established in a)?

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