Question

You are planning your retirement in 35 years. You currently have $8,000 and plan to add $3,000 at the end of each of the next 35 years. You expect to earn a return of 8.5% per year from your retirement investment account. When you retire in 35 years, you will transfer your money to an annuity account managed by an insurance company that pays a return of 3.5% per year. This annuity account will allow you to withdraw an equal amount for each of the next 20 years at the end of each year and will have nothing left afterward. How much can you withdraw each year?

Answer 1

First we need to calculate the FV of the 8000 and 3000 annuity:

We are given the following information:

Present value	PV	$              8,000.00
Rate of intereest	r	8.50%
Number of years	n	35
Annual payments	PMT	3000
Future value	FV	To be calculated

We need to solve the following equation to arrive at the required FV:

So the FV after 35 years is $ $717,142.17

Now we need to find out the annual withdrawal whose PV is  $717,142.17

We are given the following information:

PMT	To be calculated
r	3.50%
n	20
frequency	1
PV	$        7,17,142.17

We need to solve the following equation to arrive at the required PV

So the annual withdrawal is  $50,458.90