Part A:
By the end of this year, you will be 35-years old, and you want to plan for your retirement. You wish to retire at the age of 65, and you expect to live 20 years after retirement. Upon retirement, you wish to have an annual sum of $50,000 to supplement your social security benefits. Therefore, you opened your retirement account with a 7% annual interest rate. At retirement, you liquidate your account and use the funds to buy an investment-grade bond which makes $50,000 annual coupon payments based on a 6 % coupon rate throughout your retirement years.
What is the face value, not the actual value, of the bond that you will be investing in?
Please calculate the monthly payment in your retirement account in order to be able to achieve the plan mentioned above.
How much will your inheritors receive?
Now let us extend the problem so that you protect yourself against inflation.
Part B:
Suppose you think if you were to retire right now, you would have needed $50,000 each year to supplement your social security and maintain your desired lifestyle. But because there is on average 3% annual inflation, when you retire 30 years from now, you need more than $50,000 per year to maintain the lifestyle you like.
How much will be equivalent to $50,000 at retirement time when adjusted for inflation?
What will be the face value of the bond that yields the equivalent of $50,000, found in #4 of Part B in coupon payment?
How much annual payment in the retirement account is needed to accumulate the amount needed to purchase the bond when retiring?
What is the purchasing power of the amount that will be received by your inheritors, measured in the current value of $ at the time of opening the retirement account?
(Hint: First calculate what the future value will be in 30 years, which is equivalent to $50,000 now and then solve the rest of the problem).
Provide your explanations and definitions in detail and be precise. Comment on your findings. Provide references for content when necessary.
