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Mike and Sheila Parker have determined that they need a retirement fund of $2,000,000 at their...

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Mike and Sheila Parker have determined that they need aretirement fund of $2,000,000 at their planned retirement in 30years; they want to begin a savings program this year to meet thisgoal. They anticpate that they can earn an average7% after taxreturn on their retirement savings and they want to plan for 5%annual inflation. What level annual end-of-year savings amount willenable the Parkers to accumulate their targeted retirementfund?

Answer & Explanation Solved by verified expert
4.5 Ratings (1009 Votes)

Retirement Fund required at todays dollar $2,000,000
Annual Inflation Rate=5% 0.05
Nper Number of years to retirement 30
Fv Retirement Fund required in actual dollar $8,643,885 (2000000*(1.05^30)
Rate Average after tax return=7%                    0.07
PMT Annual   end of year savings required $91,507.65 (Using PMT function of excelwith Rate=0.07, Nper=30, Fv=-8643885)
Excel Command:PMT(0.07,30,,-8643885)
This problem can also be solved using factor formula
Sinking Fund Factor(SFF)=(A/F,I,N)=i/(((1+i)^N)-1)
i=Average after tax return=0.07,
N=Number of Years=30
SFF=(A/F, 7%, 30)=0.07/((1.07^30)-1)=    0.010586404
Annual   end of year savings required=SFF*8643885= $91,507.65

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Transcribed Image Text

Mike and Sheila Parker have determined that they need aretirement fund of $2,000,000 at their planned retirement in 30years; they want to begin a savings program this year to meet thisgoal. They anticpate that they can earn an average7% after taxreturn on their retirement savings and they want to plan for 5%annual inflation. What level annual end-of-year savings amount willenable the Parkers to accumulate their targeted retirementfund?

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