Question

You have a retirement account in which you have saved up $1,000,000. You are thinking of retiring and you will have to withdraw $80,000 per year to pay your living and travel expenses in retirement. How many years will it take to deplete the account (quote number of years to the nearest tenth), if the account earns 3% per year and the first withdrawal is in one year?

Answer 1

Balance in retirement account = $1,000,000
Yearly Withdrawal = $80,000
Interest Rate = 3% per year

We have to compute number of years it will take to deplete the account.

In financial terms,
PV = $1,000,000
PMT = -$80,000
FV = 0
Periodic Interest Rate = 3%
We have to find no of years.

By using the formula to calculate Number of Periods in excel. The formula is
NPer(Rate, PMT, Present Value, Future Value, Type)
where,
Rate = Interest Rate
PMT = Periodic Payments
Type is 0 if PMT are made on the end of year and 1 if the payments are made at the beginning of year.

Using the formula
N = 15.9 years (rounded off)
No of years = 15.9

So it will take 15.9 years to deplete the account.