Question

2. Retirement problem - When only a lad, Chase began investing $750 per month into a mutual fund that has earned on average 11% annually for the past 20 years.
a. How much is Chase’s account worth today?
b. Assume Chase decides to drop out of society and simply live off this investment. If he continues to earn 11% on the account, what is the maximum amount he can withdraw quarterly, assuming he plans to live 25 more years?

Answer 1

- Chase began investing $750 per month into a mutual fund for the past 20 years.

a). Calculating the Account worth today using FV of annuity formula:-

Where, C= Periodic Payments= $750

r = Periodic Interest rate = 11%/12 =0.916666%

n= no of periods = 20 years*12 = 240

Future Value = $649,228.53

So, Chase’s account worth today is $649,228.53

b). Chase will live on this amount worth today for 25 more year by witrhdrawing Quarterly amount,

calculating the Quarterly withdrawal using PV of annuity formula:-

Where, C= Periodic Payments

r = Periodic Interest rate = 11%/4 =2.75%

n= no of periods = 25 years*4 = 100

C = $19,122.49

So, the maximum amount he can withdraw quarterly is $19,122.49

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