An individual is 35 years old today and is beginning to plan for his retirement.

Question

An individual is 35 years old today and is beginning to plan for his retirement. He wants to set aside an equal amount at the end of each of the next 25 years so that he can retire at age 60. He expects to live to the maximum age of 80 and wants to be able to withdraw $25,000 per year from the account on his 61st through 80th birthdays. The account is expected to earn 10 percent per annum for the entire period of time. Determine the size of the annual deposits that must be made by this individual.

Explanation / Answer

Amount must be present in account to make withdrawl of $25000 each year be x. x = A[((1+r)^n-1)/r(1+r)^n] where A = 25000, n=20 , r =0.01 so x = 212839.1 for making an amount of 212839.1 at the end of 25 years from now she must invest y each year. 212839.1 = y[((1+r)^n-1)/r] n = 25, r = 0.01 212839.1 = y*98.34 y = 2164.16 so she must make an equal investment of 2164.16 each year for 25 years to get 25000 each year after retirement

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