The table below shows the labor market situation and life journey of a hypothetical worker in Eswatini. Study it carefully and answer the questions that follow.
\begin{tabular}{|l|l|}
\hline DESCRPTION & VALUE \\
\hline Current age & 40 years \\
\hline Age at retirement & 70 years \\
\hline Life expectancy (age at death) & 85 years \\
\hline Average monthly work today & SZL7,415.00 \\
\hline Accumulated wealth today & SZL34,521.00 \\
\hline
\end{tabular}
i. If this worker intends to maintain a stable life, how much should he/she consume per year? [2 Marks]
ii. If this worker unexpectedly won a SZL150,000 lottery, what would be his new annual consumption? [2 Marks]
iii. What are the workers marginal propensity to consume out of the lottery? [1 Marks]
iv. How much total lifetime consumption will the worker make? [1 Marks]
v. What portion of the workers total lifetime comes from current wealth? [1 Marks]
vi. How much total income will the worker earn from now until retirement? [1 Marks]
vii. How much would the worker need to save each year during working year to maintain stabl consumption on in retirement? [2 Marks]
Answer (2)
To solve these questions, we’ll analyze the worker's financial situation over his lifetime based on the information provided.
i. If this worker intends to maintain a stable life, how much should he/she consume per year?
To maintain a stable life, they should base their yearly consumption on their lifetime resources divided by the number of years of their expected life.
Total years anticipated to live = 85 years (life expectancy) - 40 years (current age) = 45 years.
Total work earnings till retirement = 30 (years from 40 to 70) * SZL 7,415 (monthly income) * 12 (months/year) = SZL 2,669,400.
Total available resources = Accumulated wealth + Total work earnings = SZL 34,521 + SZL 2,669,400 = SZL 2,703,921.
Yearly consumption = Total resources / Years to live = SZL 2,703,921 / 45 years ≈ SZL 60,087.13.
ii. If this worker unexpectedly won a SZL150,000 lottery, what would be his new annual consumption?
New total available resources = SZL 2,703,921 + SZL 150,000 = SZL 2,853,921.
New yearly consumption = New resources / Years to live = SZL 2,853,921 / 45 ≈ SZL 63,420.47.
iii. What are the worker's marginal propensity to consume out of the lottery?
The increase in yearly consumption due to the lottery = 63,420.47 - 60,087.13 = SZL 3,333.34.
Marginal propensity to consume out of lottery = Increase in consumption / Lottery amount = SZL 3,333.34 / SZL 150,000 ≈ 0.0222.
iv. How much total lifetime consumption will the worker make?
The total lifetime consumption would equal the total available resources, SZL 2,703,921 (excluding lottery), since it would all be consumed.
v. What portion of the worker's total lifetime comes from current wealth?
Portion from current wealth = Accumulated wealth / Total resources = SZL 34,521 / SZL 2,703,921 ≈ 0.0128 or 1.28%.
vi. How much total income will the worker earn from now until retirement?
As calculated earlier, total income till retirement = SZL 2,669,400.
vii. How much would the worker need to save each year during working years to maintain stable consumption in retirement?
Years of work = 30 years.
Total resources needed for retirement = Number of retirement years * Stable yearly consumption = (85 - 70) * SZL 60,087.13 = 15 * SZL 60,087.13 ≈ SZL 901,306.95.
Total savings required = SZL 901,306.95 - Accumulated wealth = SZL 901,306.95 - SZL 34,521 ≈ SZL 866,785.95.
Yearly savings required = Total savings required / Number of working years = SZL 866,785.95 / 30 ≈ SZL 28,892.87.
These calculations provide an understanding of how the hypothetical worker in Eswatini could plan his finances to maintain a stable lifestyle throughout his life considering current wealth, working income, and external windfalls like a lottery win.
The worker should consume approximately SZL 60,087.13 per year to maintain stability. If he wins SZL 150,000, his new annual consumption would increase to around SZL 63,420.47. To save for retirement, he would need to set aside approximately SZL 28,892.87 each working year.
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