A client tells you that he currently earns $100,000 per year and is comfortable with his lifestyle at that income level. He says he is planning on retiring in 5 years. If inflation averages 8% over the next 5 years, approximately what income level will this client require to maintain his current lifestyle?
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A. B. C. D. E.B
The calculation is as follows: (1.08)^(5)*100000=$146,933
To calculate the income level the client will require to maintain his current lifestyle, we need to account for the effects of inflation. Inflation erodes the purchasing power of money over time, meaning that the same amount of money will buy less in the future.
In this case, the client currently earns $100,000 per year and wants to maintain his lifestyle in retirement, which is five years away. The average inflation rate over the next five years is expected to be 8%.
To calculate the future income level required, we can use the formula:
Future Income = Current Income × (1 + Inflation Rate)^Number of Years
Plugging in the values, we have:
Future Income = $100,000 × (1 + 0.08)^5
Calculating the future income:
Future Income = $100,000 × (1.08)^5 Future Income ≈ $100,000 × 1.4693 Future Income ≈ $146,930
Rounding to the nearest thousand, the future income level required to maintain the client's current lifestyle is approximately $147,000.
Therefore, the correct answer is A. $147,000.