JOHN and twin sister JUNE have different savings plans. JOHN starts investing wi
ID: 1188787 • Letter: J
Question
JOHN and twin sister JUNE have different savings plans. JOHN starts investing with a $7,000 deposit TODAY, and will add $7,000 at the end of each of the next 8 years (for a total of 9 deposits). JUNE invests $12,000 starting in 2 years, and will add $12,000 at the end of each of years 4, 6, 8, and 10 (for a total of 5 deposits of 12K each). Both siblings plan to withdraw $5,500 at the EOY 20 to buy their parents a nice anniversary gift. Assume they earn 6% annual interest, answer the 2 questions below For the cash flows explained above, how much will each sibling have in their investment account at the end of year 257 Which one used the "better" strategy? JOHN plans to withdraw $25K at the end of each year starting with a withdrawal at EOY 26. How long (to the nearest whole number of years) will JOHN be able to make these 25K annual withdrawals until he has no money left in his account?Explanation / Answer
Solution :
a) The future value of the deposits made by John is calculated as follows :
F = A [ ( 1+r) n -1] / r
F = $ 7000 [ ( 1+0.06)9 -1 ] / 0.06
F = $ 80,439.21
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Future value of the deferred investments made by June .
FV = A [ (1+r)n -1 ] / r
FV = 12,000 [ ( 1+0.06) 9 -1 ] / 0.06
FV = $ 137,895.79
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June used the better strategy because the value of her investments will be $ 137,895.79.
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If John and June plans to withdraw $ 5,500 at EOY 20 .
The value of the Investment left with John is $ 80,439.21 - $ 5,500
The value of the Investment left with John is 74939.21 or rounded to $ 75,000
If John plans to withdraw $ 25,000 at the end of each year starting with a withdrawl at EOY 26 , then John will be able to make these 25K withdrawls for 3 years .
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