Question

Your friend is celebrating his 35th birthday and wants to start saving for his anticipated retirement at age 65. He wants to be able to withdraw $10,000 from his saving account at the end of each year for 15 years following his retirement (the first withdrawal will be at the end of his 65th year). Your friend is very risk-averse and will only invest his money in the local savings bank, which offers 8 percent interest compounded annually. He wants to make equal, annual deposits at the end of each year in a new savings account he will establish for his retirement fund.

Please show all steps. Don't round off until you get to the end.

1. If he starts making these deposits at the end of this year and continues to make deposits until he is 65 (the last deposit will be at the end of his 64th year), what amount must he deposit annually to be able to make the desired withdrawals upon retirement?

2. Suppose your friend has just inherited a large sum of money and has decided to make one lump sum payment at his 35th birthday to cover his retirement needs rather than making equal annual payments. What amount would he have to deposit?

Answer 1