Your retirement strategy is to invest 500 per month in an equity mutual fund and

Question

Your retirement strategy is to invest 500 per month in an equity mutual fund and 200 per month in a bond fund. Your retirement date is 30 years from now. The expected return on the stock fund is expected to be 8% and the expected return on the bond fund is expected to be 3%. When you retire, you will combine your money into an account with an expected 5% return. How much can you withdraw each month from your account assuming a 25 year withdrawal period? At the end of the 25 years, the account value will be zero.

Explanation / Answer

We first find future value of nvestments.

We have 30 Yrs investmnet period with monthly PMT = 500 for MF & 200 for Bond

Equity MF :

FV(MF) = FV(rate,nper,pmt,pv)

= FV(8%/12,30*12,-500,0) = $745,180

Bond Fund :

FV(BF) = FV(rate,nper,pmt,pv)

= FV(3%/12,30*12,-200,0) = $116,547

So Total Corpus at end of 30 Yrs = EF+BF

= 745180 + $116,547

= $861,727

Now for next 25 Yrs, we have PV = $861,727, FV=0, Rate = 5%/12 & we need to find monthly withdrawl PMT

So Montly withdrawl = PMT(rate,nper,pv,fv)

= PMT(5%/12,25*12,861727,0)

= $5,037.57

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