Question

In: Finance

You just turned 26. Happy birthday! Now that you’re old, you want to be responsible and...

You just turned 26. Happy birthday! Now that you’re old, you want to be responsible and start a retirement fund. You plan to invest $445 every month for the next 39 years. You expect to earn a 7.9% annual return until you retire. Once you retire, you will shift your savings into safer investments that you expect will earn 4.8% per year. You plan to make monthly withdrawals for 21 years of retirement (and don't want to have any money left at the end). Under this plan, how much money will you withdraw from your retirement account each month? (NOTE: Round your answer to the nearest cent)

Solutions

Expert Solution

Sol:

Monthly payment (PMT) = $445

Period (NPER) = 39 years, Monthly = 39 * 12 = 468

Annual interest rate = 7.9%, Monthly = 7.9 / 12 = 0.6583%

To compute how much money you will withdraw from your retirement account each month, we first have to find future value of the monthly payment by using FV function in excel and then monthly payment by using PMT function.

Annual payment

-445

Period

468

Rate

0.6583%

Future value

$1,389,843.60

Now

Present value (PV) = $1,389,843.60

Period (NPER) = 21 years, Monthly = 252

Annual interest rate = 4.8%, Monthly = 4.8 / 12 = 0.40%

Present value $1,389,843.60
Period 252
Rate 0.40%
Monthly withdrawal $8,764.34

Therefore money you can withdraw from your retirement account each month will be $8,764.34

Working


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