Finance School of management Chapter 5: Life-Cycle Financial Planning Objective Human capital, permanent income decisions over uesTc
1 Finance School of Management Chapter 5: Life-Cycle Financial Planning Objective Human capital, permanent income decisions over life cycle
Finance School of management Consumption over the Life cycle You are currently 35 years old, expect to retire in 30 years at age 65, and then to live for 15 more years until age 80 u You current income is $30,000 per year, and you real labor income adjusted for inflation remains at $30,000 per year until age 65 u The real rate of interest is 3% per year u Assume you plan to consume a constant stream of the same amount in each of the next 45 years denoted by C uesTc
2 Finance School of Management Consumption over the Life Cycle u You are currently 35 years old, expect to retire in 30 years at age 65, and then to live for 15 more years until age 80 u You current income is $30,000 per year, and you real labor income adjusted for inflation remains at $30,000 per year until age 65 u The real rate of interest is 3% per year u Assume you plan to consume a constant stream of the same amount in each of the next 45 years, denoted by C
Finance School of management Target Replacement Rate of Preretirement Income You should aim for a replacement rate equal to 75% of your preretirement income. That is 0.75*$30000=$22,500 ni pv fv PMT Rsult 15 22,500$268,604 PV FV PMT Rsult 30308268,604985,646 uesTc
3 Finance School of Management Target Replacement Rate of Preretirement Income u You should aim for a replacement rate equal to 75% of your preretirement income. That is 0.75*$30000=$22,500. n i P V F V PMT Rsult 1 5 3 ？ 0 -22,500 $268,604 n i P V F V PMT Rsult 3 0 3 0 $268,604 ? $5,646
Finance School of management Consumption over the Life Cycle PV FV PMT Result 303% 0 1$4758 PV FV PMt Result 153% 1194 uesTc
4 Finance School of Management n i PV FV PMT Result 30 3% 0 ? 1 $47.58 n i PV FV PMT Result 15 3% ? 0 1 $11.94 Consumption over the Life Cycle
Finance School of management Consumption over the Life Cycle 47.58(30,000-C)=11.94C C=$23,982-Permanent income 45 30 Human capital (1+)=1(1+i) uesTc
5 Finance School of Management 47.58(30,000 −C) =11.94C Consumption over the Life Cycle C = $23,982 — Permanent income — Human capital = = + = + 45 1 30 t (1 ) t 1 (1 ) t t t i Y i C