QUESTION

# Retirement Exercise, part 2: Financial planners are often asked by clients to estimate 'The Number.

I need help understanding what the Instructor means with the 5% discount rate in the question below:

Retirement Exercise, part 2: Financial planners are often asked by clients to estimate 'The Number.' I.e., how much must the client have invested the day she retires to meet her financial needs for the rest of her life. Now, estimate (a) your life expectancy at your retirement age (http://www.ssa.gov/oact/STATS/table4c6.html ), and (b) what percentage of final annual salary you would like to spend each year in retirement (people often assume it will be 75%-85% of final average salary). Now, using a discount rate of 5% per year, estimate the present value at your retirement age of that series of annual expenditures. What is that lump sum? (This is 'The Number' for you.) How does it compare to the guess you made at the beginning of the class?

Retirement Exercise, part 2:

Estimated Retirement Age: 65 (20 Years)

Estimate Life Expectancy: Additional 17.81 Years (18)

Percentage of Final Average Salary to Spend: 75% (141,084.88)

Total Retirement Expenditures: 18 (Years) * 141,084.88 (75% Future Estimated Nominal Annual Income)

Lump Sum = 1,649,223.97