You are considering a job that offers a pension of 80% of your highest yearly salary prior to retirement. You expect your highest yearly salary will be $70,000. What amount of savings, earning 5% per year, would you need to save in order to match the income from the pension?
Business · Middle School · Mon Jan 18 2021
Answered on
To match the income from the pension, you'll need to calculate how much savings would generate an income equivalent to 80% of your highest yearly salary, which is $70,000.
The pension will provide 80% of $70,000:
Pension Amount = 0.8×70,000 = 56,000
Now, you want to generate $56,000 per year from savings that earn 5% interest annually.
Let P be the principal amount (savings) needed to generate $56,000 per year at 5% interest.
Using the formula for calculating interest:
Interest = Principal × Rate
We can rearrange this formula to solve for the principal amount:
Principal = Interest / Rate
Principal = 56,000 / 0.05
Principal = 1,120,000
So, you would need to save $1,120,000 earning 5% per year to match the income from the pension.