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g Christine has a current annual income of $80,000 but estimates she will need nominal income of $120,000 when she retires in 20 years. Her retirement portfolio is expected to earn 6% annually over time and she assumes inflation will average 2% a year over time. She estimates her retirement stage of life will last 25 years. If her nominal income remains constant, the amount she needs in her retirement portfolio to finance her retirement stage of life is closest to: A. $1,626,040. B. $1,964,420 C. $1,890.290. D. $2,389,670. E. 2,003,700.

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jepessoa

Answer:

A. $1,626,040

Explanation:

Since we are dealing with nominal values, we do not need to adjust them to inflation. We are given the following information:

  • Christine expects to live 25 years after retiring
  • her retirement account earns 6% annually
  • she expects to withdraw $120,000 per year

this is an ordinary annuity and we must determine its present value (in 25 years):

present value = 120,000 x 12.783 (PV annuity factor, 6%, 25 periods) = $1,533,960

the closest option is A. $1,626,040

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