Question

Your client is 21 years old. She wants to begin saving for retirement, with the first payment to come one year from now. She can save $7,000 per year, and you advise her to invest it in the stock market, which you expect to provide an average return of 12% in the future.

*PLEASE DO NOT ROUND YOUR TOTALS!!

A. If she follows your advice, how much money will she have at 65? Round your answer to the nearest cent.

B. How much will she have at 70? Round your answer to the nearest cent.

C. She expects to live for 20 years if she retires at 65 and for 15 years if she retires at 70. If her investments continue to earn the same rate, how much will she be able to withdraw at the end of each year after retirement at each retirement age? Round your answers to the nearest cent.

Annual withdrawals if she retires at 65: $

Annual withdrawals if she retires at 70: $

Answer 1

a.

Annual Saving = $7,000

Interest Rate = 10%

Time Period = 36 years

Using TVM calculation,

FV = [PV = 0, PMT = 7000, T = 44, I = 12%]

FV = $8,482,687.7

b.

Saving till 70 years of age,

Using TVM calculation,

FV = [PV = 0, PMT = 7000, T = 49, I = 12%]

FV = $14,993,864.05

c.

If she retires at 65,

Using TVM calculation,

PMT = [PV = 8482687.7, FV = 0, T = 20, I = 12]

PMT = $1,135,651.79

So she can withdraw$1,135,651.79 for 20 years if she retires at 65.

If she retires at 70,

Using TVM calculation,

PMT = [PV = 14993864.05, FV = 0, T = 15, I = 12]

PMT = $2,201,462.68

So she can withdraw $2,201,462.68 for 15 years if she retires at 70.