Assume (a) that during your D = 30 years of retirement you plan to consume C^pi

Question

Assume (a) that during your D = 30 years of retirement you plan to consume C^pi = $100,000 per year and (b) that during this entire period you will earn R^pi = 8% on your money. However, instead of retiring with the appropriate value of PV(C, R, D) to fund your retirement, you have only 75% of PV(C, R, D). In other words, you are 25% underfunded at retirement. This obviously means that if you continue spending Cn then you will run out of money well before the age of death at period D. Compute the period during which you will run out of money. Derive a general expression for the "ruin period if you retire with z

Explanation / Answer

Compute the present of the fund needed to withdraw $100,000 per year upto 30 years.

Nper = 30.

Rate = 0.08

Pmt = $100,000.

Compute the present value by using the excel function.

PV = PV(Rate,Nper, Pmt, FV)

= =PV(0.08,30,-100000)

= $1,125,778.

Therefore, you should deposit $1,125,778 at the time of retirement to withdraw upto 30 years.

But, you have only 75% of the deposit amount. COmpute the period upto which you can withdraw.

Deposit amount = $1,125,778 = $844,333.75

Compute Nper.

Nper = Nper(Rate,Pmt,PV,FV)

= =NPER(0.08,100000,-844333.75)

=14.62 years.

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