Question

Sharon, age 34, is thinking about investing for retirement. She plans to retire when she turns age 65. At that time, she will need $2.60 million in assets. She has calculated that inflation will average 2.55% over her lifetime. If she can earn an average annual 7.35% rate of return, what will be her real rate of return?

Answer 1

Answer:

The real rate of return is 4.68%

Explanation:

The fisher formula would be used here, which is as under:

(1+n) = (1+r)*(1+i)

Here

n = nominal or money rate = 7.35%

r = real rate of return = r

i = inflation rate = 2.55%

Now by putting values we have:

(1+7.35%) = (1+r)*(1+2.55%)

(1+r) = (1.0735) / (1.0255)

1 + r  = 1.0468

r = 1.0468  - 1 = 0.0468 = 4.68%

The real rate of return is 4.68%.