You are trying to decide how much to save for retirement. Assume you plan to sav

Question

You are trying to decide how much to save for retirement. Assume you plan to save $ 5,500 per year with the first investment made one year from now. You think you can earn 9.5% per year on your investments and you plan to retire in43 years, immediately after making your last $ 5,500 investment.c. If you hope to live for 26 years in retirement, how much can you withdraw every year in retirement (starting one year after retirement) so that you will just exhaust your savings with the 26th withdrawal (assume your savings will continue to earn 9.5% in retirement)? d. If, instead, you decide to withdraw $ 562 000 per year in retirement (again with the first withdrawal one year after retiring), how many years will it take until you exhaust your savings? (Use trial-and-error, a financial calculator: solve for "N", or Excel: function NPER) e. Assuming the most you can afford to save is $ 1 ,100 per year, but you want to retire with $ 1,000,000 in your investment account, how high of a return do you need to earn on your investments? (Use trial-and-error, a financial calculator: solve for the interest rate, or Excel: function RATE)

Explanation / Answer

a. PMT = 5500, PV = 0, N = 43, rate = 9.5%

use FV function in Excel

future value = 2,809,227.50

PV = 2,809,227.50, FV = 0, rate = 9.5%, N = 26

use PMT function in Excel

c. amount one can withdraw = 294,714.37

d. PV = 2,809,227.50, FV = 0, rate = 9.5%, PMT = -562,000

use Nper funciton in Excel

number of years = 7.10 years

e. PMT = 1100, FV = -1,000,000, N = 43, PV = 0

use rate function in Excel

rate = 11.43 %

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