Question

striker has a 2 million saved for retirement. he expects to retire in 7 years. his retirment fund is expected to earn a nominal rate of 7%, and the inflation rate is estimated at 3%. stoker's retirement balance, in real terms is closest to:

Answer 1

The real value of Striker's retirement fund, after adjusting for inflation and using the real rate of return, is closest to $2,579,532.70 in 7 years.

Step-by-step explanation:

The correct answer is option (B).

To calculate the real value of a retirement fund in future terms, we need to adjust for inflation. Striker expects to retire in 7 years with a retirement fund that is currently worth $2 million and is expected to earn a nominal rate of 7%, with an estimated inflation rate of 3%. To find the real rate of return, we use the formula (1 + nominal rate) / (1 + inflation rate) - 1. Substituting the values, we get:

(1 + 0.07) / (1 + 0.03) - 1 = (1.07/1.03) - 1 = 1.0388 - 1 = 0.0388 or 3.88% as the real rate of return.

Now, we apply the compound interest formula to find the future value in real terms:

$2,000,000 * (1 + 0.0388)7 = $2,579,532.70 (rounded to two decimal places).

Thus, Striker's retirement balance, in real terms, is closest to $2,579,532.70.