You are planning your retirement in 10 years. You currently have $175,000 in a b

Question

You are planning your retirement in 10 years. You currently have $175,000 in a bond account and $615,000 in a stock account. You plan to add $6,500 per year at the end of each of the next 10 years to your bond account. The stock account will earn a return of 11.25 percent and the bond account will earn a return of 7.75 percent. When you retire, you plan to withdraw an equal amount for each of the next 25 years at the end of each year and have nothing left. Additionally, when you retire you will transfer your money to an account that earns 7 percent.

Required: How much can you withdraw each year in your retirement?

Explanation / Answer

Solution: (i) Bond account Year (A) Opening balance (B) Deposite end of year (c ) Interset on-B ( C) Closing balance(B+C+D) 1 175000 6500 13562.5 195062.5 (a) 2 195062.5 6500 15117.34 216679.8438 (b) 3 216679.844 6500 16792.69 239972.5316 4 239972.532 6500 18597.87 265070.4028 5 265070.403 6500 20542.96 292113.3591 6 292113.359 6500 22638.79 321252.1444 7 321252.144 6500 24897.04 352649.1856 8 352649.186 6500 27330.31 386479.4975 9 386479.497 6500 29952.16 422931.6585 10 422931.659 6500 32777.2 462208.8621 Note : 1. Interest on amount deposited at end of year will only be receive from next year and onward and not in that year itself. 2. Interest on that is also invested @ same rate of interest i.e. 7.75% (ii) Stock account Opening balance 615000 FVAF (11.25%, 10) 2.904024 Value at end [(a) * (b)] 1785974.7 Total fund at T-10 = bond + stock = 462208.9 + 1785975 = 2248184 Now Equal annual withdrawn for 25 year @ 7% interest is : = total fund/ present value annuity factor @7% for 25 year = 2248184/11.65358 = 192917.8

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