Question

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You are 30 and have decided you need to start saving for retirement in your 401(k) by depositing $1,325 per month. You are splitting your money between two investment options: 60% in Fund Aggressive which is expected to earn 10.5% annually and 40% in Fund Conservative which is expected to earn 5% annually. Once you retire at 65 and want to be sure that your spending lasts for 30 years. How much can you spend per month in retirement? Assume a 6% discount rate in retirement.

Answer 1

Answer :

Investment in aggressive = 1,325*60% = 795

Investment in conservative fund = 1,325*40% = 530

Value of fund in 35 years can be calculated using FV function

N = 35*12 = 420, I/Y = 10.5%/12, PMT = 795, PV = 0

Compute FV = $3,436,497 is the value of aggressive fund

Similarly, N = 35*12 = 420, I/Y = 5%/12, PMT = 530, PV = 0

Compute FV = $602,129 - Conservative fund

Total corpus = $4,038,626

Monthly withdrawal can be calculated using PMT function

N = 30*12 = 360, PV = 4,038,626, FV = 0, I/Y = 6%/12

Compute PMT = $24,213.61 is monthly amount you can spent.

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