Mr. Romanov, who is 25 years old, is planning for retirement, and in order to provide for it, he estimates that he will need 2 200 000 monetary units at the age of 65, adjusted for inflation, i.e., in terms of today’s purchasing power. He does not have any current savings. His daughter, Anastasia, was just born, and Mr. Romanov also plans to provide for her college education, which will cost 180 000 monetary units when she turns 18, also in terms of today’s purchasing power. Mr. Romanov invests conservatively in securities with rates of return matching the rate of inflation. Calculate the optimal annual savings amount that Mr. Romanov should invest every year at the beginning of the year, to fund his liabilities in an optimal fashion.

Assume now that Mr. Romanov of Exercise above has decided instead to invest in stocks, earning an annual real (i.e., after inflation) rate of return of 7%. How will this change his optimal funding structure?

Now assume now that Mr. Romanov is willing to take a very high level of risk and, as a result, will earn substantially higher rate of return. How high will that rate of return have to be so that Mr. Romanov does not save for retirement while saving for the cost of college education of Anastasia Romanov?