Question

Old Alfred Road has reached his seventieth birthday and is ready to retire. He has accumulated savings of $180,000, conservatively invested. The investments are yielding 9% interest. Mr. Road also has $12,000 in a savings account at 5% interest. Mr. Road will also receive $750 per month in Social Security payments for the rest of his life. He wants to keep the savings account intact for unexpected expenses or emergencies, although he is happy to use the interest earned on the savings account for his personal expenses. Mr. Road's basic living expenses now average about $1,500 per month, and he plans to spend $500 per month on travel and hobbies. Mr. Road expects to live for 20 more years. Based on this information, if Mr. Road plans to run down the investment in his retirement account (not the savings account) to zero by the time he dies, compute Mr. Road's expected annual income and his expected annual expenses.

Answer 1

Answer:

Accumulated savings = $180,000

Yield = 9%

Time period = 20 years

To get possible amount of annual withdrawal , we will use PMT function of excel:

PMT (rate, nper, pv, fv, type)

=PMT (9%,20, -180000,0, 1)

= $18,090.24

Annual Withdrawal = $18090.24

Interest earnings = 12,000 * 5% = $600

Social Security payments = $750 * 12= $9,000

As such:

Mr. Road's expected annual income = $18,090.24 + $600 + $9,000 = 27690.24

Expected annual expenses = $1,500 * 12 + $500 * 12 = $24,000

Mr. Road's expected annual income = $27,690.24

and Expected annual expenses = $24,000