A Man is planning to retire in 20 years. He can deposit money for his retirement

Question

                            A Man is planning to retire in 20 years. He can deposit money for his retirement at 6% compounded monthly. It is estimated that the future general                             inflation rate will be 5% compounded annually. What deposit must be made each month until the man retires so that he can make annual withdraws of                             $40,000 in terms of today's dollars over the next 15 years following his retirement? (assume that his first withdrawl occurs at the END of the first                             six months after his retirement)

Explanation / Answer

Where did your $40K number come from?!?!? I don't see that in the inital problem.

Break the problem into solvable chunks. There are four of them here.
1. PV of $50/month
2. PV of $4000/year for 4 years
3. PV of deposits on 8-17th birthdays
4. Annuity of of part 3 [steps 3/4 are combined below]


Assume that girl is now 4 years old and it is time (t)=0

Next, bring the future values (FV) into present value (PV).

PV[1] ($4K "annuity")= (P/F,5,18-4) + (P/F,5,19-4) + (P/F,5,20-4) + (P/F,5,21-4)

PV[2] (monthly deposit of $50) = 50(P/A, 5/12, 48 months)

You need to find the annuity that gives you the difference between PV[1] and PV[2].

PV[1-2] = x(P/A, 5,13) - x(P/A,5,4)

Solve for X, all the others are available in look up tables or your previous calculations.



Skip the .5 year stuff. Just bring the problem back to PVs where you can manipulate and solve in the same year dollars.

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