Suppose You Divide Your Life into Two Periods: Working Age

question 10

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 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 (starting from the situation in part (a).Will you save more or less?

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Definitions:

Sublingual

Pertaining to administration under the tongue, often used for rapid absorption of medications into the bloodstream.

Medication Order

A directive, usually written by a healthcare provider, that instructs on the dosage, route, and frequency of a medication administered to a patient.

Quantity Sufficient

A term used in prescriptions and recipes to indicate that the amount should be enough to achieve the desired effect or result.

Abbreviation

The shortened or contracted form of a word or phrase, used to save space or avoid repetition.