You are 40 years old and have a salary of $50,000 per year. When you retire at age 66, you want to have a salary that has the same buying power as the one you currently have. If you estimate that the inflation rate will be 1.25% per year, what will your final salary need to be?
so you want
50000(1.0125)^26
= .....
To determine the final salary you will need when you retire, we need to account for the impact of inflation over time. Here's how you can calculate it step-by-step:
Step 1: Calculate the number of years until you retire:
Number of years until retirement = Retirement age - Current age
Number of years until retirement = 66 - 40
Number of years until retirement = 26
Step 2: Calculate the cumulative inflation rate over the number of years until retirement:
Cumulative inflation rate = (1 + Inflation rate)^Number of years
Cumulative inflation rate = (1 + 0.0125)^26
Cumulative inflation rate = 1.35804043
Step 3: Calculate the final salary you will need:
Final salary = Current salary * Cumulative inflation rate
Final salary = $50,000 * 1.35804043
Final salary ≈ $67,902.02
Therefore, to have the same buying power as your current salary of $50,000 per year, your final salary when you retire at age 66 would need to be approximately $67,902.02 per year.
To determine what your final salary needs to be in order to maintain the same buying power as your current salary, you need to account for inflation over the years. Here's how you can calculate that:
1. Calculate the number of years until retirement:
Retirement age - Current age = Years until retirement
66 - 40 = 26 years
2. Calculate the cumulative inflation rate over the retirement period:
Cumulative inflation rate = (1 + Inflation rate) ^ Years
In this case: Cumulative inflation rate = (1 + 0.0125) ^ 26
3. Calculate the equivalent buying power of your current salary:
Equivalent salary = Current salary * Cumulative inflation rate
In this case: Equivalent salary = $50,000 * (1 + 0.0125) ^ 26
Now, let's calculate your final salary:
4. Calculate the equivalent salary at retirement age:
Equivalent final salary = Equivalent salary * Cumulative inflation rate
In this case: Equivalent final salary = [Equivalent salary at current age] * (1 + 0.0125) ^ 26
5. Plug in the values to calculate the final salary:
Final salary = Equivalent final salary / Cumulative inflation rate
In this case: Final salary = [Equivalent final salary at retirement age] / (1 + 0.0125) ^ 26
By following these steps and using the provided values, you can calculate the final salary you need to maintain the same buying power as your current salary.