Tiffany is saving up towards her eventual retirement. She expects to retire 40 years from now, and plans to be able to support herself in retirement for 30 years after that. She is highly risk averse, and consequently wants to place her savings in low risk assets.
a) If low risk assets are expected to offer a real rate of return of approximately 2.5% per annum over the next 70 years, and Tiffany’s intention is to provide herself with an additional $50,000 per year in retirement, based on her saving, how much will she need to set aside each year between now and her retirement?
A financial advisor informs Tiffany that she can expect a higher average return on her saving if she is prepared to invest in higher risk assets. Over her time horizon, the advisor recommends she consider this possibility seriously.
b) If higher risk assets offer an expected real return of 6.5% per annum, and Tiffany maintains the same level of savings as before, how much additional annual retirement spending can she expect she will be able to provide for herself?