Question

You want to be able to withdraw $25,000 each year for 20 years. Your account earns 6% interest.

a) How much do you need in your account at the beginning?

$

b) How much total money will you pull out of the account?

$

c) How much of that money is interest?

$

Answer 1

Given that,

annual withdrawal PMT = $25000 each year for next t = 20 years

interest rate r = 6%

a). Account balance at the beginning is calculated using PV formula of annuity,

PV = PMT*(1 - (1+r)^(-t))/r = 25000*(1 - 1.06^-20)/0.06 = $286748.03

So, amount need in account at the beginning = $286748

b). Total money put out of the account = annual withdrawal*number of year = 25000*20 = $500000

c). Interest portion = total withdrawal - account balance at beginning = 500000 - 286748 = $213252