You are trying to decide how much to save for retirement. Assume you plan to sav

Question

You are trying to decide how much to save for retirement. Assume you plan to save $4,500 per year with the first investment made one year from now. You think you can earn 7.5% your inves ments and you plan to retire in 28 years, immediately after making your last per ear on $4,500 investment. a. How much will you have in your retirement account on the day you retire? b. If, instead of investing $4,500 per year, you wanted to make one lump-sum investment today for your retirement that will result in the same retirement saving, how much would that lump sum need to be? c. If you hope to live for 30 years in retirement, how much can you withdraw every year in retirement (starting one year after retirement so that you will just exhaust your savings with the 30th withdrawal (assume your savings will continue to earn 7.5% in retirement d. If, instead, you decide to withdraw $79,000 per year in retirement (again with the first withdrawal one year after retiring, how many years will it take until you exhaust your savings? (U trial-and-error, a financial calculator: solve for "N" or Excel: function NPER se e. Assuming the most you can afford to save is $900 per year, but you want to retire with $1,000,000 in your investment account, how high of a return do you need to earn on your investments? (U trial-and-error, a financial calculator: solve for the interest rate, or Excel: function se RATE

Explanation / Answer

All calculation is based on simple interest rate.

1. calculation of retairment account balance on the date of retairment.

Principal = $4500

Time        = 28year

Interest rate = 7.5%pa

*Assume total installment is 28.

So, end of last installment these amount are available in my account.

This is excel formula.

Fv = (7.5%/12,28 * 12 - $375**)

** $4500 / 12 = 375

Total ammount paid = 1,26,000.

Ammount in the account on the date of last installment = $4,26,779

B. Insted of instalment payment we can invest a lump-sum ammount for the same result is............

Excel formula :- Future ammount / (1+Rate)^Time

                                            $1,26,000 / (1+7.5%)^28

Persent value of $1,26,000 = $16,631.58

Future value of investment = $4,26,779

C. If we withdraw every year = $35,809 then fund will exhust in 30 year.

Expected Retirement Age (Years) = 60

Life Expectancy (Years)               = 90

Fund utilisetion year                    = 30

Funds at Expected Retirement Age ($) 426,779

Expected Annual Return on Fund (%)   7.5%

Annual Income in Retirement ($ / Year) = 35,809

D. calculation of time of Exhustation of my saving of $4,26,779

E. calculation of expected interest rate of investment.

Principle amount 900/annum

Time    = 28year

Expected return after 28 year = $10,00,000

($10,00,000 /7.5%)^(1/28)-1

So interest rate must be = 28.46%

That fund $426,779 if earning 7.5% can last 30 years providing an annual income of $36,136 with a real value of $            18,100 Alternatively, with the same return and annual with- drawals of $79,000 that fund would last for approx. 7 years.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.