Question

Suppose that you are planning for retirement. You are 26 and plan to retire when you are 70, 44 years from now. Your investment goal (based on the 3-legged retirement model) is to gain $5 million at the time you retire. Your opportunity cost of capital (discount rate) is 8 percent. What would be your maximum withdrawal from your personal investment account if you plan to exhaust your personal savings at age 90?

The project average rate of inflation (for a full employment economy) is 3 percent and, inflation will affect your withdrawal amount. How would inflation affect your annual withdrawal? Provide the amortized schedule.

Answer 1

Retirement fund is given as $5,000,000 and withdrawals in 20 years from retirement.

Without inflation, the withdrawals constitute an ordinary annuity. With inflation, it is a growing annuity.

Withdrawals without inflation= $509,261.04

Calculation as below:

With inflation, withdrawals will be less initially, to be increased gradually, every year, at the rate of inflation. First withdrawal is $408,161.88 as follows:

Widrawals every year and the amortization are as follows: