Your sister turned 35 today, and she is planning to save $7,500 per year for ret
ID: 2724245 • Letter: Y
Question
Your sister turned 35 today, and she is planning to save $7,500 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund thats expected to provide a return of 7% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 20 years after retirement, to age 85. Under these assumptions, how much can she spend each year after she retires? Her first withdrawal will be made at the end of her first retirement year.
Explanation / Answer
The total amount of retirement corpus that she can accumulate is calculated using the FV function in excel as in = fv(rate,nper,pmt) where rate = 0.07, nper = 65- 35 = 30 years and pmt = 7500
Hence retirement corpus =fv(0.07,30,7500) = $ 708,455.90
Now the amount of money she can withdraw for 20 years of her retirement is given by PMT function in excel as in =pmt(rate,nper,pv) where rate = 0.07, nper = 20 and pv = 708,455.90
Now the annual withdrawal that she can spend is = pmt(0.07,20,708455.90) = $66,873.22
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