You hope to retire in 30 years, when you do, you would like to have the purchasi

ID: 2811759 • Letter: Y

Question

You hope to retire in 30 years, when you do, you would like to have the purchasing power of $100,000 today, during each year of retirement. Your cash is needed at the beginning of each year of retirement. Inflation is expected to be 3% per year from now until the end of your retirement. Your retirement will last 25 years, you expect your 401k to earn 5% per year during your retirement years. How much money do you need at the beginning of your retirement years, to “just meet” your retirement needs (i.e. what is the size of the needed nest egg)?

(NOT Using excel, Please show your work. Use the financial calculator, please write the parameters that you plugged in the calculator)

Explanation / Answer

Solution:

Amount to be withdrawn annually:

Annual withdrawal = 100000*(1+3%)^30 = $242,726.25

Withdrawal for 25 years.

*Set financial calculator on BEGIN mode*:

Now, calculate how much balance should you have in account to support 25 withdrawals:

Using financial calculator BA II Plus - Input details:

I/Y = Rate =

PMT = - 100000*(1+3%)^30 =

-$242,726.25

N = Number of years remaining x frequency =

FV = Future Value =

$0.00

CPT > PV = Value required to support 25 withdrawals =

$3,592,018.79