You are currently 25 years old and want to start saving for your retirement. You

Question

You are currently 25 years old and want to start saving for your retirement.  You start off very determined and put aside $5,000 every year, starting one year from now, for 10 years.  Finally, you get sick of saving and spend all your salary but leave your savings (balance plus earned interest) untouched for another 20 years when you retire. Assume interest rates are 7% compounded semi-annually while you are saving, but drop to 6% compounded quarterly after that.  

a)   How much will you be able to draw a year when you retire at 55 assuming your first withdrawal occurs at the end of your retirement year if you estimate you will live for 25 years after retirement?  

b)   How will your answer change if you start receiving funds at the beginning of the year instead of the end of the year?

Explanation / Answer

b)

b)

In this case he will have to withdraw 17071 for 25 years after retirement

Calculation of Annuity Factor (1+0.061364)*(1-1/(1+0.061364)^25)/0.061364 = 13.39376

Calculation of Payments = Balance at the retirement/Annuity factor =228656/13.39376=17071

Year (Age) Cash Flows EIR Opening Balance Interest Earned Closing Balance 25 5000 0.071225 0 0 5000 26 5000 0.071225 5000 356 10356 27 5000 0.071225 10356 738 16094 28 5000 0.071225 16094 1146 22240 29 5000 0.071225 22240 1584 28824 30 5000 0.071225 28824 2053 35877 31 5000 0.071225 35877 2555 43432 32 5000 0.071225 43432 3093 51526 33 5000 0.071225 51526 3670 60196 34 5000 0.071225 60196 4287 69483 35 0.061363551 69483 4264 73747 36 0.061363551 73747 4525 78272 37 0.061363551 78272 4803 83075 38 0.061363551 83075 5098 88173 39 0.061363551 88173 5411 93584 40 0.061363551 93584 5743 99326 41 0.061363551 99326 6095 105422 42 0.061363551 105422 6469 111891 43 0.061363551 111891 6866 118757 44 0.061363551 118757 7287 126044 45 0.061363551 126044 7735 133778 46 0.061363551 133778 8209 141988 47 0.061363551 141988 8713 150700 48 0.061363551 150700 9248 159948 49 0.061363551 159948 9815 169763 50 0.061363551 169763 10417 180180 51 0.061363551 180180 11056 191237 52 0.061363551 191237 11735 202972 53 0.061363551 202972 12455 215427 54 0.061363551 215427 13219 228646 55 -17071 0.061363551 211575 12983 224558 56 -17071 0.061363551 207487 12732 220219 57 -17071 0.061363551 203148 12466 215614 58 -17071 0.061363551 198543 12183 210726 59 -17071 0.061363551 193655 11883 205538 60 -17071 0.061363551 188467 11565 200032 61 -17071 0.061363551 182961 11227 194188 62 -17071 0.061363551 177117 10869 187986 63 -17071 0.061363551 170914 10488 181402 64 -17071 0.061363551 164331 10084 174415 65 -17071 0.061363551 157344 9655 166999 66 -17071 0.061363551 149928 9200 159128 67 -17071 0.061363551 142057 8717 150775 68 -17071 0.061363551 133703 8205 141908 69 -17071 0.061363551 124837 7660 132497 70 -17071 0.061363551 115426 7083 122509 71 -17071 0.061363551 105438 6470 111908 72 -17071 0.061363551 94837 5820 100657 73 -17071 0.061363551 83586 5129 88715 74 -17071 0.061363551 71644 4396 76040 75 -17071 0.061363551 58969 3619 62587 76 -17071 0.061363551 45516 2793 48309 77 -17071 0.061363551 31238 1917 33155 78 -17071 0.061363551 16084 987 17071 79 -17071 0.061363551 0 0 0

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