Question

1. Liz has retiring from the U S Postal Service and will turn 70 next year. Liz has accumulated $700,000 in her thrift savings plan. The government requires that she convert it to an annuity or move it to a IRA. All of the money is pretax and tax can be avoided if it is moved to the IRA. The annuity will be calculated based on her life expectancy of 18 years after age 70. https://www.ssa.gov/cgi-bin/longevity.cgi. The annuity guarantees 3.0% per year. How much will she get as an annuity annual payment? Should Liz take the annuity or move the money to the IRA.? The Tax regulations require that she take out 4% of the amount each year. Use the Excel PMT function to calculate the annual annuity payment. What is the annual withdrawal from the IRA if the investment earns 10% per year and Liz takes out 4%? What happens to the annual wthdrawal from the IRA if the investment earns 4% and Liz takes out 4% per year? You have three options to compare: (1) the annuity @3%; (2) the IRA @10% with 4%withdrawal; and (3) the IRA @4% with 4% witdrawal. Assume all withdrawals are at the end of the year. You want to compare all three options over 18 years.

Answer 1

	Pv	Amount accumulated	$700,000
	Rate	Guaranteed return	3%
	Nper	Number of years of annuity	18
	PMT	Annual annuity payment	$50,896	(Using PMT function of excel with Rate=3%, Nper =18, Pv=-700000)
		IRA with 10% earning and 4% witdrawal
		Amount accumulated	$700,000
		4% withdrawal	$28,000
			A	B=A*1.1	C=A*0.04	D=B-C
		Year	Beginning amount	Ending amount with 10% Earning	4% withdrawal	Net Ending amount
		1	$700,000	$770,000	$28,000	$742,000
		2	$742,000	$816,200	$29,680	$786,520
		3	$786,520	$865,172	$31,461	$833,711
		4	$833,711	$917,082	$33,348	$883,734
		5	$883,734	$972,107	$35,349	$936,758
		6	$936,758	$1,030,434	$37,470	$992,963
		7	$992,963	$1,092,260	$39,719	$1,052,541
		8	$1,052,541	$1,157,795	$42,102	$1,115,694
		9	$1,115,694	$1,227,263	$44,628	$1,182,635
		10	$1,182,635	$1,300,899	$47,305	$1,253,593
		11	$1,253,593	$1,378,953	$50,144	$1,328,809
		12	$1,328,809	$1,461,690	$53,152	$1,408,538
		13	$1,408,538	$1,549,391	$56,342	$1,493,050
		14	$1,493,050	$1,642,355	$59,722	$1,582,633
		15	$1,582,633	$1,740,896	$63,305	$1,677,591
		16	$1,677,591	$1,845,350	$67,104	$1,778,246
		17	$1,778,246	$1,956,071	$71,130	$1,884,941
		18	$1,884,941	$2,073,435	$75,398	$1,998,037
		IRA with 4% earning and 4% witdrawal
		Amount accumulated	$700,000
		4% withdrawal(Constant)	$28,000
		Ending balance after 18 years	$700,000