John Adams is the CEO of a nursing home in San Jose. He is now 50 years old and plans to retire…

John Adams is the CEO of a nursing home in San Jose. He is now 50 years old and

plans to retire in 10 years. He expects to live for 25 years after he retires, that is, until

he is 85. He wants a fixed retirement income that has the same purchasing power at

the time he retires as $40,000 has today (he realizes that the real value of his

retirement income will decline year by year after he retires). His retirement income

will begin the day he retires, 10 years from today, and he will then get 24 additional

annual payments. Inflation is expected to be 5 percent per year for 10 years (ignore

inflation after John retires); he currently has $100,000 saved up, and he expects to

earn a return on his savings of 8 percent per year, annual compounding. To the

nearest dollar, how much must he save during each of the next 10 years (with deposits

being made at the end of each year) to meet his retirement goal? (Hint: the inflation

rate 5 % per year is used only to calculate desired retirement income.)

 

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