Suppose You Divide Your Life into Two Periods: Working Age

question 99

Essay

Suppose you divide your life into two periods: working age and retirement age.When you work,you earn labor income Y; when retired,you earn no labor income,but must live off your savings and the interest it earns.You have no initial assets.You save the amount S while working,earning interest at rate r,so you have (1 + r)S to live on when retired.Because you don't need to consume as much when retired,you want to set consumption when working twice as high as consumption when retired.
(a)Suppose you earn $1 million over your working life,and the real interest rate for retirement saving is 50%.How much will you save,and how much will you consume in each part of your life?
(b)Suppose your current income went up to $2 million when working.Now what will you save and how much will you consume each period?
(c)Suppose a social security system will pay you 25% of your working income when you are retired.Now (with Y = $1 million as in part (a)how much will you save and how much will you consume each period?
(d)Suppose the interest rate rises.Will you save more or less?

---

Definitions:

Pain Signals

Nervous system responses to harmful stimuli, warning the body of potential injury.

Nervous System

The body’s speedy, electrochemical communication network, consisting of all the nerve cells of the peripheral and central nervous systems.

Distraction

Distraction involves diverting attention away from an unwanted focus, towards a different target to reduce emotional discomfort or to refocus cognitive resources.

Favorite Food

A specific food item that a person prefers over others due to taste, cultural, or personal reasons.