You are currently 25 years old and want to start saving for your retirement. You

Question

You are currently 25 years old and want to start saving for your retirement.  You start off very determined and put aside $5,000 every year, starting one year from now, for 10 years.  Finally, you get sick of saving and spend all your salary but leave your savings (balance plus earned interest) untouched for another 20 years when you retire. Assume interest rates are 7% compounded semi-annually while you are saving, but drop to 6% compounded quarterly after that.  

a)   How much will you be able to draw a year when you retire at 55 assuming your first withdrawal occurs at the end of your retirement year if you estimate you will live for 25 years after retirement?  

b)   How will your answer change if you start receiving funds at the beginning of the year instead of the end of the year?

Explanation / Answer

You are currently 25 years old and want to start saving for your retirement. You start off very determined and put aside $5,000 every year, starting one year from now, for 10 years. Finally, you get sick of saving and spend all your salary but leave your savings (balance plus earned interest) untouched for another 20 years when you retire. Assume interest rates are 7% compounded semi-annually while you are saving, but drop to 6% compounded quarterly after that.

Amount at the time of retirement available =( fv(7.1225%,10,5000,0))*1.015^80 = $ 2,28,645.94

a) How much will you be able to draw a year when you retire at 55 assuming your first withdrawal occurs at the end of your retirement year if you estimate you will live for 25 years after retirement?

Amount withdrawl each year = pmt(6.136355%,25,228645.94,0,1) = $ 17071.08

b) How will your answer change if you start receiving funds at the beginning of the year instead of the end of the year?

Amount withdrawl each year = pmt(6.136355%,25,228645.94,0,0) = $ 18,118.62

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