You are planning your retirement in 10 years. You currently have $160,000 in a b

Question

You are planning your retirement in 10 years. You currently have $160,000 in a bond account and $600,000 in a stock account. You plan to add $8,000 per year at the end of each of the next 10 years to your bond account. The stock account will earn a return of 10.5 percent and the bond account will earn a return of 7 percent. When you retire, you plan to withdraw an equal amount for each of the next 25 years at the end of each year and have nothing left. Additionally, when you retire you will transfer your money to an account that earns 6.25 percent.

How much can you withdraw each year in your retirement? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations.Round your answer to 2 decimal places (e.g., 32.16).)

You are planning your retirement in 10 years. You currently have $160,000 in a bond account and $600,000 in a stock account. You plan to add $8,000 per year at the end of each of the next 10 years to your bond account. The stock account will earn a return of 10.5 percent and the bond account will earn a return of 7 percent. When you retire, you plan to withdraw an equal amount for each of the next 25 years at the end of each year and have nothing left. Additionally, when you retire you will transfer your money to an account that earns 6.25 percent.

Explanation / Answer

Amount at the time of retirement:

Bond account:

Amount in Stock account:

Current amount in stock account = $600,000.

return on stock account is 10.5%

Value of stock account after 10 years= $600,000(1+0.105)10

=$1,628,448.51

Total amount available at the time of retirement = $425,275.80 +$1,628,448.51 = $2,053,724.31.

Using PMT function of Excel one can find out the amount, the person can draw every year for 25 years, so that zero amount is left at the end of 25 years.

PMT(r,nper,pv,fv,type).

r is the rate of interest, in the present case it is 6.25% = 0.0625

nper is the number of periods one wish to withdraw, in the present case it is 25.

PV is the present value of the amount that is to be withdrawn over a period = $2,053,724.31

fv is the value of amount one would wish to have at the end of the period, in the present case it is zer0.

type is whether the with drawl is made at the begining of the period if yes it is "1"or if at the end of the period it is zero.

Substituting the values in the formula PMT(.0625,25,$2,053,724.31,0,0) = $164,492.27.

Bond a/c Amount at the beginning of the year (A) Addition (B) Interest on the amount at the beginning of the year ( C) Amount at the end of the year (A+B+C) Current $         160,000.00 $               -   $      160,000.00 1 $         160,000.00 $ 8,000.00 $               11,200.00 $      179,200.00 2 $         179,200.00 $ 8,000.00 $               12,544.00 $      199,744.00 3 $         199,744.00 $ 8,000.00 $               13,982.08 $      221,726.08 4 $         221,726.08 $ 8,000.00 $               15,520.83 $      245,246.91 5 $         245,246.91 $ 8,000.00 $               17,167.28 $      270,414.19 6 $         270,414.19 $ 8,000.00 $               18,928.99 $      297,343.18 7 $         297,343.18 $ 8,000.00 $               20,814.02 $      326,157.20 8 $         326,157.20 $ 8,000.00 $               22,831.00 $      356,988.21 9 $         356,988.21 $ 8,000.00 $               24,989.17 $      389,977.38 10 $         389,977.38 $ 8,000.00 $               27,298.42 $      425,275.80

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