You (as in the person taking this test!) are planning for your retirement. Assum
ID: 3007340 • Letter: Y
Question
You (as in the person taking this test!) are planning for your retirement. Assume you can earn 6% interest compounded annually, and assume that you want to get a payment every year for 25 years after you retire. In the spreadsheet below, show your calculations and highlight your anwers in yellow. How much of an annual payment do you want to get after you retire? How much will you need to have accumulated in order to fund your desired annual payments? How many years do you have until you retire? How much do you need to save each year to get to the amount you will need to fund your retirement?
Explanation / Answer
Spreadsheet has not been given by you, so it can't be solved but still for your help, I have taken an example from my side to explain you the entire concept very clearly.
Please go through the below solution to get all your concepts cleared.
Information given:
1. Will save for 10 years, then receive payments for 25 years.
2. Wants payments of $60,000 per year in today’s dollars for the first payment only. Real income will decline. Inflation will be 5 percent.
FV = ?
Enter N = 10, I = 5, PV = -60000, PMT = 0, and press FV to get FV = $97,733.68.
3. He now has $150,000 in an account that pays 7 percent, annual compounding. We need to find the FV of $150,000 after 10 years. Enter N = 10, I = 7, PV = 150000, PMT = 0, and press FV to get FV = $295,072.70.
4. He wants to withdraw, or have payments of, $97,733.68 per year for 25 years, with the first payment made at the beginning of the first retirement year. So, we have a 25-year annuity due with PMT = $97,733.68, at an interest rate of 7 percent. (The interest rate is 7 percent annually, so no adjustment is required.) Set the calculator to “BEG” mode, then enter N = 25, I = 7, PMT = -97733.68, FV = 0, and press PV to get PV = $1,218,673.90. This amount must be on hand to make the 25 payments.
5. Since the original $150,000, which grows to $295,072.70, will be available, he must save enough to accumulate $1,218,673.90 - $295,072.70 = $923,601.20.
6. The $923,601.20 is the FV of a 10-year ordinary annuity. The payments will be deposited in the bank and earn 7 percent interest. Therefore, set the calculator to “END” mode and enter N = 10, I = 7, PV = 0, FV = 923601.20, and press PMT to find PMT = -$66,847.95.
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