You are planning to save for retirement over the next 30 years. To save for reti

Question

You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $1,700 per month in a stock account in real dollars and $595 per month in a bond account in real dollars. The effective annual return of the stock account is expected to be 12 percent, and the bond account will have an annual return of 8 percent. When you retire, you will combine your money into an account with an effective annual return of 9 percent. The inflation rate over this period is expected to be 4 percent. How much can you withdraw each month from your account in real terms assuming a 25-year withdrawal period? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Monthly withdrawal What is the nominal dollar amount of your last withdrawal? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Last withdrawal $

Explanation / Answer

COnverting to nominal APRs with monthly compounding:
12%:=((1+12%)^(1/12)-1)*12=11.3866%
8%:=((1+8%)^(1/12)-1)*12=7.7208%
9%:=((1+9%)^(1/12)-1)*12=8.6488%

COnverting to real APRs:
12%:=(1+11.3866%)/(1+4%)-1=7.1025%
8%:=(1+7.7208%)/(1+4%)-1=3.5777%
9%:=(1+8.6488%)/(1+4%)-1=4.47%

Real AMount that can be withdrawn every month=PMT(4.47%/12,12*25,FV(7.1025%/12,12*30,1700)+FV(3.577%/12,12*30,595))=13851

Nominal amount of last withdrawl=13851*1.04^25=36924.49903

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