Question:
Good news: You will almost certainly be a millionaire by the time you retire in 40 years.
Bad news: The inflation rate over your lifetime will average about 3.2%
a) What will be the real value of $1 million by the time you retire in terms of today's dollars?
b) What real annuity (in today's dollars) will $1 million support if the real interest rate at retirement is 2.2% and the annuity must last for 10 years.
Fisher Equation:
The Fisher Equation, named after economist Irving Fisher, is an economic theory that relates nominal interest rate to real interest rate and the expected rate of inflation. When these rates are relatively small, the equation takes a simple form: nominal interest rate = real interest rate + expected rate of inflation.
Answer and Explanation:1
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a) The real value in today's dollar is $283,669.15.
The value of the $1 million today is the value of $1 million discounted at the inflation rate of...
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