Question

Your sister turned 35 today, and she is planning to save $6,500 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that will provide a return of 9.25% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend in each year after she retires? Her first withdrawal will be made at the beginning of her first retirement year.

Answer 1

Information provided:

Annual saving= $6,500

Time= age 65 - age 35 = 30 years

Interest rate= 9.5%

First, the amount accumulated when my sister is calculated.

The future value is calculated by entering the below in a financial calculator:

PMT= 6,500

N= 30

I/Y= 9.25

Press CPT and FV to compute the future value.

The value obtained is 928,383.61.

Therefore, the future value of the annual saving is $928,383.61.

Next, the amount withdrawn during retirement is calculated.

The payment is made at the beginning of the quarter, so the question pertains to annuity due.

The financial calculator is set in the end mode.  Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^ndBGN 2^ndSET on the Texas BA II Plus calculator.

The amount of withdrawal is calculated by entering the below in a financial calculator:

PV= -928,383.61

N= 25

I/Y= 9.25

Press CPT and PMT to compute the amount of monthly withdrawal.

The value obtained is 88,271.39.

Therefore, she can spend $88,271.39 each year after she retires.