Question

Steve is planning for his retirement. He is currently 37 and plans to retire in 26 years, at age 63. He expects then to live an additional 34 years, until age 97. He expects inflation to average 5% per year. He believes he can earn a nominal return on his retirement investments of 8% per year before retirement, and 6% per year after retirement. Based on his assumptions about investment returns, inflation and Social Security, and his desired Wage Replacement Rate, he believes he will need to accumulate $6,000,000 in nominal terms by the day of his retirement in order to produce enough income to achieve his retirement income goal. Use the Annuity method with the Dalton approach. How much does he need to contribute to his retirement fund at the end of each year to accumulate enough by the day he retires?

Answer 1

**How to calculate Steve's annual retirement contribution using the Annuity method with the Dalton approach:**

1. **Calculate the real rate of return before retirement.**

The real rate of return is calculated using the following formula:

```

Real rate of return = Nominal rate of return - Inflation rate

```

In Steve's case, the real rate of return before retirement is 8% - 5% = 3%.

2. **Calculate the real rate of return after retirement.**

The real rate of return after retirement is calculated using the same formula:

```

Real rate of return = Nominal rate of return - Inflation rate

```

In Steve's case, the real rate of return after retirement is 6% - 5% = 1%.

3. **Calculate the annual contribution.**

The annual contribution is calculated using the following formula:

```

Annual contribution = Future value / (1 + Interest rate)^Years

```

where:

* Future value is the amount of money Steve needs to accumulate by the day of his retirement, which is $6,000,000 in nominal terms.

* Interest rate is the real rate of return on Steve's retirement investments, which is calculated using the Dalton approach.

In Steve's case, the annual contribution is calculated as follows:

```

Annual contribution = 6000000 / (1 + 0.03)^26 = $30845.67

```

**Conclusion:**

Steve needs to contribute $30845.67 to his retirement fund at the end of each year to accumulate enough by the day he retires.