Discussion Topic: Retirement Planning Using TVM One common application for TVM c

Question

Discussion Topic: Retirement Planning Using TVM

One common application for TVM concepts is retirement planning using two separate annuities. The first annuity involves determining the payment stream you need to invest to accumulate a lump sum for retirement (future value). The next annuity involves calculating how much you can draw annually from that lump sum once you retire (present value). Let’s make some assumptions and then apply the TVM concepts to solve the questions. Assume you will retire at 65, that you wish to accumulate $250,000 at retirement, you earn 6% on your investments consistently throughout your life, and that the cash flows occur at the end of the year.

Your original discussion post should include:

Given your age today (please state), how much will you have to contribute each year to accumulate the $250,000 goal at retirement (use TVM technique and show your work)?

Next, say you estimate you will live for 20 years after retiring. How much will you be able to withdraw from this account annually for the 20 year period (use TVM technique and show your work)?

In the real world, what are numerous other factors that would come into play as you evaluate these two aforementioned questions? Try for a minimum of five.

Explanation / Answer

Pre-retirement

We have

My current age is 25 years.

FV =250,000

N =65-25 = 40

R= 6%

We can use Future value of annuity formula to calculate yearly investment required:

FV of annuity = pmt x FVIFA(n,r%)

250,000 = pmt x FVIFA(40,6%)

FVIFA(n,r%) can be found in FV of ordinary annuity table.

Pmt = 250,000/154.762

         = 1615.38

Hence yearly payment required is 1,615.38.

Post-retirement

N = 20

PV = 25,000

R = 6%

We can use Present value of annuity formula to calculate yearly withdrawal amount

PV of annuity = pmt x PVIFA(n,r%)

250,000 = pmt x PVIFA(20,6%)

Pmt = 250,000/11.4699

Pmt = 21,796.18

Factors affecting these calculations are:

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