Question

1. You are planning to save for retirement over the next 25 years. To do this, you will invest $1,400 a month in a stock account and $1,100 a month in a bond account. The return of the stock account is expected to be 10 percent, and the bond account will pay 6 percent. When you retire, you will combine your money into an account with a return of 9 percent. How much can you withdraw each month from your account assuming a 20-year withdrawal period?

2.

Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $50,000 and you plan to spend all of it. However, you want to start saving for retirement beginning next year. You have decided that one year from today you will begin depositing 4 percent of your annual salary in an account that will earn 11 percent per year. Your salary will increase at 6 percent per year throughout your career.

How much money will you have on the date of your retirement 39 years from today?

Answer 1

- You Invest in Stock account for 25 years with $1400 a month.

calculating the Future Value of Stock account at the end of 25 years:-

Where, C= Periodic Savings = $1400

r = Periodic Interest rate = 10%/12 = 0.8333%

n= no of periods = 25 years*12 = 300

Future Value of Stock Account= $1,857,566.76

- You Invest in Bond account for 25 years with $1100 a month.

calculating the Future Value of Stock account at the end of 25 years:-

Where, C= Periodic Savings = $1100

r = Periodic Interest rate = 6%/12 =0.5%

n= no of periods = 25 years*12 = 300

Future Value of Bond Account= $762,293.36

Combined value of account at retirement date = $762,293.36 + $1,857,566.76

= $2,619,860.12

Now, from the above combined account value withdrawal will take place each month for 20 years.

calculating the Periodic withdrawals:-

Where, C= Periodic Withdrawals

r = Periodic Interest rate = 9%/12 =0.75%

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

Present Value = $2,619,860.12

C = $23,571.56

So, withdraw each month from your account is $23,571.56

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