Question

You are planning to save for retirement over the next 25 years. To do this, you will invest $500 per month in a retirement account. The rate of return for the retirement account is expected to be 9 percent per year. After you retire, you expect that the account will have an annual return of 6 percent. How much can you withdraw each month from your account assuming a 20-year withdrawal period during retirement?

Answer 1

Given that,

$500 per month will be saved for next 25 years for retirement.

interest rate = 9% compounded monthly

So, Value of account after 25 years can be calculated using FV formula of an annuity,

FV = PMT*((1+r/n)^(n*t) - 1)/(r/n) = 500*((1 + 0.09/12)^(12*25) - 1)/(0.09/12) = $560560.97

So, amount in retirement account after 25 years = $560560.97

thereafter interest rate is 6%

An constant monthly withdrawal is made for next 20 years.

So, this monthly payment can be calculated using PV formula of annuity,

PMT = PV*(r/n)/(1 - (1+r/n)^(-n*t)) = 560560.97*(0.06/12)/(1 - (1+0.06/12)^(-12*20)) = $4016.03

So, Monthly withdrawal of $4016 can be made.