Question

Dan is 65 and is retiring this year. He currently has $1 million in his account. Assume his life expectancy is 95 and the current interest rate is 9%. Dan wants to use up all the money before he dies. How much should he withdraw at the beginning of each month to cover his daily living expenses?

A. $89,299.40

B. $7,986.33

C. $7,441.62

D. $8,046.23

Answer 1

Information provided:

Present value= $1,000,000

Time= 95 years – 65 years= 30 years*12= 360 months

Interest rate= 9%/12= 0.75% per month

The question is concerning finding monthly withdrawal of an annuity due. Annuity due refers to annuity that occurs at the beginning of a period.

This can also be solved using a financial calculator by inputting the below into the calculator:

The financial calculator is set in the end mode. Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^nd BGN 2^nd SET on the Texas BA II Plus calculator.

The monthly withdrawal is calculated by entering the below in a financial calculator:

PV= -1,000,000

N= 360

I/Y= 0.75

Press the CPT key and PMT to compute the amount of monthly withdrawal.

The value obtained is 7,986.33.

Therefore, the amount of monthly withdrawal at the beginning of eavh month is $7,986.33.

Hence, the answer is option b.

In case of any query, kindly comment on the solution.