Question

In: Finance

Your client is 40 years old. She wants to begin saving for retirement, with the first...

Your client is 40 years old. She wants to begin saving for retirement, with the first payment to come one year from now. She can save $12,000 per year, and you advise her to invest it in the stock market, which you expect to provide an average return of 7% in the future.

  1. If she follows your advice, how much money will she have at 65? Round your answer to the nearest cent.

    $  

  2. How much will she have at 70? Round your answer to the nearest cent.

    $  

  3. She expects to live for 20 years if she retires at 65 and for 15 years if she retires at 70. If her investments continue to earn the same rate, how much will she be able to withdraw at the end of each year after retirement at each retirement age? Round your answers to the nearest cent.

    Annual withdrawals if she retires at 65: $

    Annual withdrawals if she retires at 70: $

Solutions

Expert Solution

a.Information provided:

Annual saving= $12,000

Interest rate= 7%

Time= 25 years

The question is solved by calculating the future value.

Enter the below in a financial calculator to compute the future value:

PMT= 12,000

N= 25

I/Y= 7

Press the CPT key and FV to compute the future value.

The value obtained is 758,988.45.

Therefore, she will have $758,988 at 65 years.

b. Information provided:

Annual saving= $12,000

Interest rate= 7%

Time= 30 years

The question is solved by calculating the future value.

Enter the below in a financial calculator to compute the future value:

PMT= 12,000

N= 30

I/Y= 7

Press the CPT key and FV to compute the future value.

The value obtained is 1,133,529.44.

Therefore, she will have $1,133,529 at 70 years.

c.i.The amount of yearly withdrawal is calculated by entering the below in a financial calculator:

PV= -758,988

I/Y= 7

N= 20

Press the CPT key and PMT to compute the amount of yearly withdrawal.

The value obtained is 71,643.10.

Therefore, she will be withdraw $71,643 each year for 20 years if she retires at 65 years.

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

PV= -1,133,529

I/Y= 7

N= 15

Press the CPT key and PMT to compute the amount of yearly withdrawal.

The value obtained is 124,455.39.

Therefore, she will be withdraw $124,455 each year for 15 years if she retires at 70 years.

In case of any query, kindly comment on the solution.

jeff jeffy answered 5 months ago
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