In: Finance
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)
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