Question

A new client comes into an investment office. She is looking to invest money into an...

A new client comes into an investment office. She is looking to invest money into an IRA. She has determined that she wants to retire at age 68 and be able to withdraw $3500 a month from her IRA for the next 25 years. The IRA at that time will return 4% interest. If she is 33 years old right now and the IRA she wants to invest in can return 11% interest until she retires, how much should she begin paying each month? (Hint: Figure the amount needed to start paying out first.

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Answer #1

We will need a financial calculator to solve this.

Amount needed at age 68

PMT =3,500 n = 12*25 =300 I = 4*1/12 = 0.33 calculate pv

PV = $665,867

Now this is the total discounted value of cash flows at age 68.

Now at age 33, we need to calculate the monthly amount to be invested at 11% interest so that this amount becomes $665,867 by age 68.

N=12*(68-33)= 420, Fv = $665,867, I =11 *1/12 =0.916 PV=0

Calculate PMT

PMT =$135.14

Client should begin paying each month $135.14 to achieve her objective.

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