Question: Your aunt and uncle are aware that you are taking a finance class and

Question

Question: Your aunt and uncle are aware that you are taking a finance class and have come to you for advice. They are making plans for retirement and want to know their options. They have currently saved $250,000 for retirement and would like to retire sometime in the next 15 to 20 years. They may either invest in lower-risk investments with a return of about 6% per year or in higher-risk investments with a return ofapproximately 9% per year. They are currently 50 years old and assume that they will live until approximately 85 years of age. Based on the potential number of years remaining to work and potential investment strategies, what is the range of potential annual payouts your aunt and uncle could receive during retirement. Assume their post-retirement investment rate would be 5%.

Explanation / Answer

PMT = $250,000

Assuming they retire at 65 years, N = 15 (65-15).

If invested at low-risk investments 6% per year, r = 6% (Considering their age, opting low-risk investment)

Future Value, FV in Excel = FV(rate,N,PV) = $5,818,992

Post-retirement investment rate would be 5%, r = 5%

No. of Years, N = 20 (85-65)

Now, the future value will be present value here, PV = $5,818,992

Annual payouts aunt and uncle could receive during retirement, PMT = PMT(rate, N, PV) = $466,932

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