2. (2 points) You are planning ahead and have decided to start saving for retire

Question

2. (2 points) You are planning ahead and have decided to start saving for retirement. Even though you do not have much money to spare at this time, you have decided to put $50 each month into a savings account that yields a nominal interest of 1.2%, compounded monthly. Time is on your side! Assume that you can continue to make this investment for the next 40 years. 2.1. How much money will you have accrued at the end of that time period? 2.2. You expect to start withdrawing money from this savings account starting five years following your last deposit into that account. Your withdrawals will be of the same amount each month and you plan to deplete your funds over 15 years. How much money will you be able to withdraw each month over that time period?

Explanation / Answer

Answer1: Following are the steps to calucate the F.V. of $50 monthly savings yielding 1.2%, compounding monthly for 40 years

Step1: Open Excel, type =FV

Step2: Enter, Rate= 1.2%, NPER=480 (40 years* 12 months), PMT= 50 & Type=0

Step3: Press Enter, you'll get $1,273,551 which is the money you have acrued at the end of 40 years.

Answer3: Now this is a tricky question and could be read in two ways.

Scenario1: To stop depositing money after 5 years and deplete rest of the money in equal amount per month for 15 years

Scenario2: To continue to deposit money after 5 years and deplete rest of the money in equal amount per month for 15 years.

Scenario1: Following are the steps

Step1: Open Excel, Type =FV

Step 2: Enter RATE= 1.2%, NPER= 60 (5 YEARS*12 MONTHS), PMT=50 & TYPE=0

Step 3: Press Enter, you'll get $4,357 which you have to deplete over 180 months (15 years)

So, you can withdraw ($4357/180)= $24.2 every month for 15 years.

Scenario 2: Following are the steps

Step1: Open Excel, Type =FV

Step 2: Enter RATE= 1.2%, NPER= 180 (15 YEARS*12 MONTHS), PMT=50, PV= 4357 & TYPE=0

Step 3: Press Enter, you'll get $68,798 (ignore negative signs if any) which you have to deplete over 180 months (15 years).

So, you can withdraw ($68798/180)= $382 every month for 15 years

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