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You and your wife are making plans for retirement. You plan on living 25 years a

ID: 2730665 • Letter: Y

Question

You and your wife are making plans for retirement. You plan on living 25 years after you retire and would like to have $80,000 annually on which to live. Your first withdrawal will be made one year after you retire and you anticipate that your retirement account will earn 12% annually.

Find and show work for the following answers using a financial calculator:

a) What amount do you need in your retirement account the day you retire? Round your answer to the nearest cent. Do not round intermediate calculations.
____________________   

b) Assume that your first withdrawal will be made the day you retire. Under this assumption, what amount do you now need in your retirement account the day you retire? Round your answer to the nearest cent. Do not round intermediate calculations.
_____________________

Explanation / Answer

Answer 1: When withdrawal is made after 1 year of retirement

Period

PVF

Annual Withdrawal

Present value of annual withdrawal

1

0.893

80000

71428.57143

2

0.797

80000

63775.5102

3

0.712

80000

56942.41983

4

0.636

80000

50841.44627

5

0.567

80000

45394.14846

6

0.507

80000

40530.48969

7

0.452

80000

36187.93723

8

0.404

80000

32310.65824

9

0.361

80000

28848.802

10

0.322

80000

25757.85893

11

0.287

80000

22998.08833

12

0.257

80000

20534.00744

13

0.229

80000

18333.93521

14

0.205

80000

16369.58501

15

0.183

80000

14615.7009

16

0.163

80000

13049.73295

17

0.146

80000

11651.54727

18

0.130

80000

10403.16721

19

0.116

80000

9288.542151

20

0.104

80000

8293.341206

21

0.093

80000

7404.768934

22

0.083

80000

6611.400834

23

0.074

80000

5903.036459

24

0.066

80000

5270.568267

25

0.059

80000

4705.864524

Amount required at the time of retirement

627451.129

Proof of Answer 1:

Principal amount at the time of retirement

Period

Interest rate

Interest on Principal Amount

Amount of Withdrawal

Balance Principal

627451.129

1

0.12

75294.13548

80000

622,745.26

2

0.12

74729.43173

80000

617,474.70

3

0.12

74096.96354

80000

611,571.66

4

0.12

73388.59917

80000

604,960.26

5

0.12

72595.23107

80000

597,555.49

6

0.12

71706.65879

80000

589,262.15

7

0.12

70711.45785

80000

579,973.61

8

0.12

69596.83279

80000

569,570.44

9

0.12

68348.45273

80000

557,918.89

10

0.12

66950.26705

80000

544,869.16

11

0.12

65384.2991

80000

530,253.46

12

0.12

63630.41499

80000

513,883.87

13

0.12

61666.06479

80000

495,549.94

14

0.12

59465.99256

80000

475,015.93

15

0.12

57001.91167

80000

452,017.84

16

0.12

54242.14107

80000

426,259.98

17

0.12

51151.198

80000

397,411.18

18

0.12

47689.34176

80000

365,100.52

19

0.12

43812.06277

80000

328,912.59

20

0.12

39469.51031

80000

288,382.10

21

0.12

34605.85154

80000

242,987.95

22

0.12

29158.55373

80000

192,146.50

23

0.12

23057.58017

80000

135,204.08

24

0.12

16224.4898

80000

   71,428.57

25

0.12

8571.428571

80000

          (0.00)


Answer 2: When withdrawal is made at the time of retirement

Period

PVF

Annual Withdrawal

Present value of annual withdrawal

0

1.000

80000

80000

1

0.893

80000

71428.57143

2

0.797

80000

63775.5102

3

0.712

80000

56942.41983

4

0.636

80000

50841.44627

5

0.567

80000

45394.14846

6

0.507

80000

40530.48969

7

0.452

80000

36187.93723

8

0.404

80000

32310.65824

9

0.361

80000

28848.802

10

0.322

80000

25757.85893

11

0.287

80000

22998.08833

12

0.257

80000

20534.00744

13

0.229

80000

18333.93521

14

0.205

80000

16369.58501

15

0.183

80000

14615.7009

16

0.163

80000

13049.73295

17

0.146

80000

11651.54727

18

0.130

80000

10403.16721

19

0.116

80000

9288.542151

20

0.104

80000

8293.341206

21

0.093

80000

7404.768934

22

0.083

80000

6611.400834

23

0.074

80000

5903.036459

24

0.066

80000

5270.568267

Amount required at the time of retirement

702745.2644


Proof of Answer 2:

Principal amount at the time of retirement

Period

Interest rate

Interest on Principal Amount

Amount of Withdrawal

Balance Principal

702745.2644

0

0.12

80000

   622,745.26

1

0.12

74729.43173

80000

   617,474.70

2

0.12

74096.96354

80000

   611,571.66

3

0.12

73388.59917

80000

   604,960.26

4

0.12

72595.23107

80000

   597,555.49

5

0.12

71706.65879

80000

   589,262.15

6

0.12

70711.45785

80000

   579,973.61

7

0.12

69596.83279

80000

   569,570.44

8

0.12

68348.45273

80000

   557,918.89

9

0.12

66950.26705

80000

   544,869.16

10

0.12

65384.2991

80000

   530,253.46

11

0.12

63630.41499

80000

   513,883.87

12

0.12

61666.06479

80000

   495,549.94

13

0.12

59465.99256

80000

   475,015.93

14

0.12

57001.91167

80000

   452,017.84

15

0.12

54242.14107

80000

426,259.98

16

0.12

51151.198

80000

   397,411.18

17

0.12

47689.34176

80000

   365,100.52

18

0.12

43812.06277

80000

   328,912.59

19

0.12

39469.51031

80000

   288,382.10

20

0.12

34605.85154

80000

   242,987.95

21

0.12

29158.55373

80000

   192,146.50

22

0.12

23057.58017

80000

   135,204.08

23

0.12

16224.4898

80000

     71,428.57

24

0.12

8571.428571

80000

             (0.00)

Period

PVF

Annual Withdrawal

Present value of annual withdrawal

1

0.893

80000

71428.57143

2

0.797

80000

63775.5102

3

0.712

80000

56942.41983

4

0.636

80000

50841.44627

5

0.567

80000

45394.14846

6

0.507

80000

40530.48969

7

0.452

80000

36187.93723

8

0.404

80000

32310.65824

9

0.361

80000

28848.802

10

0.322

80000

25757.85893

11

0.287

80000

22998.08833

12

0.257

80000

20534.00744

13

0.229

80000

18333.93521

14

0.205

80000

16369.58501

15

0.183

80000

14615.7009

16

0.163

80000

13049.73295

17

0.146

80000

11651.54727

18

0.130

80000

10403.16721

19

0.116

80000

9288.542151

20

0.104

80000

8293.341206

21

0.093

80000

7404.768934

22

0.083

80000

6611.400834

23

0.074

80000

5903.036459

24

0.066

80000

5270.568267

25

0.059

80000

4705.864524

Amount required at the time of retirement

627451.129