Question

Your sister turned 30 today, and she is planning to save $12,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that's expected to provide a return of 7.5% per year. She plans to retire 35 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend each year after she retires? Her first withdrawal will be made at the end of her first retirement year.

Answer 1

Amount saved per year = $12000, No of years saved = 35 years, Annual rate of return on mutual fund = 7.5%

First we need to find the amount accumulated at retirement by saving 12000 per year for 35 years at annual rate of 7.5%.

We can find find the amount accumulated at retirement by finding the future value of amounts saved per year and this can be done using fv function in excel

Formula to be used in excel: =fv(rate,nper,-pmt)

Using fv function in excel we get amount accumulated at retirement = $1851019.27

Now she will make annual withdrawals at the end of year for next 25 years from her accumulated amount for spending needs

These annual withdrawals form a ordinary annuity for next 25 years.

To find the amount of annual withdrawals we will make use pmt function in excel

Formula to be used in excel : =pmt(rate,nper,-pv)

Using pmt function in excel, we amount of annual withdrawal after retirement = 166056.18

Hence Amount she can spend per year = $166056.18