Question

You want to retire in 40 years and plan to invest $1,800 per month until you retire. If you would like to be able to withdraw $600,000 per year for 25 years during retirement, what annual rate will you have to earn until retiring if you expect to earn 5% after you retire?

A.)9.01%

B.)7.50%

C.)13.96%

D.)10.13%

E.)11.64%

Answer 1

A.)9.01%

Value of investment at the start of retirement, using a financial calculator

PMT = 600000

FV=0

N=25

I/Y = 5

CPT PV, we get PV = -8456366.73

Hence, Value of investment at the start of retirement = $8456366.73

Now, we want to know the annual rate which will guarantee $8456366.73 at the start of retirement

Using a financial calculator

PMT = 1800

FV=8456366.73

N=480 (Since 40 years*12 months = 480 monthly periods)

PV = 0

CPT I/Y, we get I/Y= 0.7510

Annualising, the annual rate in %= 0.7510*12 = 9.01%