Question

At age 35, Frugal Frannie started saving $7,000 per year for retirement, with annual deposits being made at the end of each year. Frannie invests her funds in a mutual fund that earns 7.5% per year. She plans to retire in 30 years, at age 65. How much will Frannie have in her retirement account when she retires? Round answer to nearest dollar and do not use a dollar sign Frannie assumes she will live to be 90 years old, therefore she will spend 25 years in retirement. Using the value you computed in the prior problem, how much can Frannie spend each year after she retires?

Answer 1

The question is solved in two parts. First the value of Frannie's retirement account at age 65 is calculated.

Information provided:

Yearly saving= $7,000

Interest rate= 7.5%

Time= 30 years

The amount in Frannie's retirement account at age 65 by computing the future value.

Enter the below in a financial calculator to compute the future value:

PMT= -7,000

N= 30

I/Y= 7.75

Press the CPT key and FV to compute the future value.

The value obtained is 723,795.82.

Therefore, the amount in the Frannie's retirement account after 30 years is $723,795.82.

Next, the amount that Frannie can spend each year is calculated by entering the below in a financial calculator:

PV= -723,795.82

N= 25

I/Y= 7.75

Press the CPT key and PMT to compute the monthly payment.

The value obtained is 66,362.25.

Therefore, the amount that Frannie can spend each year is $66,362.25.