Question

Suppose the inflation rate is 2% per year. If you currently think of $40,000 as an acceptable retirement income and are expecting to retire in 40 years, what will the equivalent annual income then be, adjusted for inflation?

Answer 1

Answer:

$88,321.59

Explanation:

Assuming that inflation remains constant at a rate of 2% over 40 years, this problem can be treaded as an annually compounded interest problem, with a principal of $40,000 at a 2% per year rate for 40 years.

The equivalent annual income (E) adjusted for inflation is given by:

$E= P*(1+r)^t\\E= 40,000*(1+0.02)^{40}\\E=\ 88,321.59$

In 40 years, the equivalent retirement income will be $88,321.59.