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Question 2: John is 40 years old today (this is time 0). He is hoping...

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Accounting

Question 2: John is 40 years old today (this is time 0). He is hoping to retire at age 65 (exactly on his 65th birthday) and actuarial tables suggest that he is likely to live until the age of 85. He wants to move to a Caribbean Island when he retires at age 65 (on his 65th birthday). He estimates that it will cost him $50,000 to make the move on his 65th birthday. Starting on his 65th birthday and ending on his 84th birthday (all withdrawals are at the beginning of the year), he will withdraw $40,000 per year for annual living expenses. Assume interest rate to be 5.5% for all calculations.

  1. What is the total amount required on the 65th birthday so that this amount can be used to make all the expenditures in retirement? Use the timeline method to solve this question. (16)
  2. What is the present value (i.e., value at year 40) of the required savings calculated in part a? (4)
  3. To attain the retirement goal, John plans on saving an equal amount each year starting from today. The last savings will be made on his 64th birthday. How much would he need to save each year? (8)

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