4. Importance of expenses. Over your future investing & retired life, assume you

Question

4. Importance of expenses. Over your future investing & retired life, assume you earn 8% before expenses. You have $10,000 in your Roth IRA. You save an additional $5,500 per year for the next 45 years. You plan to spend your portfolio over a 25-year retirement.

a. Assume your investment expenses are 0.9% per year. How much can you spend each year in retirement? [Deduct the expense from the 8% as a first step.]

b. Assume your investment expenses are index fund low —0.1% per year. How much can you spend each year in retirement? [Deduct the expense from the 8% as a first step.]

c. How big a % increase is this?

Explanation / Answer

a)

Earning rate = 8% - 0.9% = 7.1%

Value after 45 years = 10000*FV(7.1%,45,,-1) + 5500*FV(7.1%,45,-1)

   = 10000*21.9 + 5500*294.42

   = 1838376.10

Retirment spend = 1838376.10*PMT(7.1%,25,-1)

=159175.72

b)

Earning rate = 8% - 0.1% = 7.9%

Value after 45 years = 10000*FV(7.9%,45,,-1) + 5500*FV(7.9%,45,-1)

   = 10000*30.62 + 5500*374.90

   = 2368126.38

Retirment spend = 2368126.38*PMT(7.9%,25,-1)

= 219951.28

c)

% increase = ( 219951.28 - 159175.72 ) / 159175.72

= 38.18%

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