Question

You have

​$500,000

in an IRA​ (Individual Retirement​ Account) at the time you retire. You have the option of investing this money in two​ funds: Fund A pays

3.6​%

annually and Fund B pays

6.1​%

annually. How should you divide your money between Fund A and Fund B to produce an annual interest income of

​$26,000?

Answer 1

Let the investment in fund-A is X.

Therefore, the investment in fund-B is (500,000 – X).

As per the condition given,

X × 3.6% + (500,000 – X) × 6.1% = 26,000

X × 0.036 + (500,000 – X) × 0.061 = 26,000

0.036X + 500,000 × 0.061 – 0.061X = 26,000

0.036X – 0.061X + 30,500 = 26,000

-0.025X = 26,000 – 30,500

-0.025X = - 4,500

0.025X = 4,500

X = 4,500 / 0.025

  = 180,000

Hence,

500,000 – X = 500,000 – 180,000 = 320,000

Answer: Fund-A investment is $180,000; Fund-B investment is $320,000.