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26 January, 08:44

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?

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Answers (2)
  1. 26 January, 11:06
    0
    4.69 % in return
  2. 26 January, 12:34
    0
    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%.
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