Question

You plan to retire one year from now. Your current balance in your tax-deferred retirement account is $730,798, and you don't plan additional contributions. You plan to draw down retirement account by taking equal annual payouts for 30 years. When you draw a payout, you plan to deposit it in a checking account to cover expenses for the upcoming year. Thus, on the day that you retire, you will draw a payout to cover your first year in retirement; one year after retiring, you will draw a second payout to cover your second year in retirement; and so forth. From the perspective of today (one year before retirement), the payouts form an ordinary annuity.

You plan to invest in a portfolio with an estimated rate of return of 9% per year. (For the sake of this case, assume that you invest your current balance in this portfolio today.)

What is your expected annual payout (before taxes), based on these forecasts?

Round your answer to the nearest dollar.

Answer 1

Present Value of your balance in your tax-deferred retirement account is $730,798

You will retire one year from now and will start withdrawing equal payouts each year starting from the same retirement date. You will withdraw 30 annual equal payouts.

Calculating the amount of Annual Payouts using Present Value of ordinary annuity:-

Where, C= Periodic Annual Payouts

r = Periodic Interest rate = 9%

n= no of periods = 30

Present value = $730,798

C = $71,133

So, your expected annual payout (before taxes), based on these forecasts is $71,133