Question

On her 23rd birthday, an engineer decides to start saving toward building up a retirement fund that pays 8% interest compounded quarterly (market interest rate). She feels that $600,000 worth of purchasing power in today's dollars will be adequate to see her through her sunset years after her 63rd birthday. Assume a general inflation rate of 6% per year.

Answer 1

To calculate the buying power when measured in today's dollars, we need to account for the effects of inflation. The rise in the price level over the 16 years can be calculated using the formula for compound interest. The buying power of $20,000 after 16 years is approximately $8,527.74 in today's dollars.

Step-by-step explanation:

To calculate the buying power when measured in today's dollars, we need to account for the effects of inflation. The rise in the price level over the 16 years can be calculated using the formula for compound interest. The inflation rate of 6% per year means that the price level will increase by a factor of (1 + 0.06)^16.

So the buying power of $20,000 after 16 years will be $20,000 divided by (1 + 0.06)^16. We can use a calculator to find that the buying power in today's dollars is approximately $8,527.74.