Your client is 40 years old; and she wants to begin saving for retirement, with

Question

Your client is 40 years old; and she wants to begin saving for retirement, with the first payment to come one year from now. She can save $5,000 per year; and you advise her to invest it in the stock market, which you expect to provide an average return of 9% in the future.
a. If she follows your advice, how much money would she have at 65?
b. How much would she have at 70?
c. If she expects to live for 20 years in retirement if she retires at 65 and for 15 years at 70, and her investments continue to earn the same rate, how much could she withdraw at the end of each year after retirement at each retirement age?

Explanation / Answer

a) Calculating the future value of annuity using excel sheet:

Step1: Go to excel sheet and click "insert" to insert the function.
Step2: Select the "FV" function as we are finding the future value of annuity in this case.

Step3: Enter the values as Rate = 9%; Nper = 25; PMT = -5000
Step4: Click "OK" to get the desired value.

The value comes to "$423,504"

b) Calculating the future value of annuity using excel sheet:

Step1: Go to excel sheet and click "insert" to insert the function.
Step2: Select the "FV" function as we are finding the future value of annuity in this case.

Step3: Enter the values as Rate = 9%; Nper = 30; PMT = -5000
Step4: Click "OK" to get the desired value.

The value comes to "$681,537"

c) To calculate the withdrawl amount, we need to find out the future value till her retirement.

As we calculated above, the future value is $423,504. This value becomes the present value for the coming 20yrs.
Now, calculating the withdrawl amount at each retirement age:

Step1: Go to excel sheet and click "insert" to insert the function.
Step2: Select the "PMT" function as we are finding the Annuity withdrawl amount in this case.

Step3: Enter the values as Rate = 9%; Nper = 20; PV = -423504
Step4: Click "OK" to get the desired value.

The value comes to "$46,393"
The amount that can be withdrawed at each retirement age is $46,393

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