You are planning your retirement in 10 years. You currently have $168,000 in a b

Question

You are planning your retirement in 10 years. You currently have $168,000 in a bond account and $608,000 in a stock account. You plan to add $7,200 per year at the end of each of the next 10 years to your bond account. The stock account will earn a return of 10.5 percent and the bond account will earn a return of 7 percent. When you retire, you plan to withdraw an equal amount for each of the next 22 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 6.25 percent. How much can you withdraw each year in your retirement? (Round answer to two decimal places)

Explanation / Answer

Answer: Future value=$7200*[(1+0.07)^10-1/0.07]+$168000*(1.07)^10

=99478+330482

=$429960

The total value of the stock account at retirement will be the future value of a lump sum, so:

FV = PV(1 + r ) t

FV = $608,000(1 + 0.105) 10

FV = $1650161.15

The total value of the account at retirement will be:

Total value at retirement =$1650161.15+$429960

Total value at retirement = $2080121.15

So, at retirement, we have:

This amount is the present value of the annual withdrawals. Now we can use the present value of an annuity equation to find the annuity amount.

PV=2080121.15/PVIFA(6.25%,22)

C=176517.81

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