Question

Derek plans to retire on his 65th birthday. However, he plans to work part-time until he turns 75.00. During these years of part-time work, he will neither make deposits to nor take withdrawals from his retirement account. Exactly one year after the day he turns 75.0 when he fully retires, he will begin to make annual withdrawals of $186,309.00 from his retirement account until he turns 85.00. After this final withdrawal, he wants $1.09 million remaining in his account. He he will make contributions to his retirement account from his 26th birthday to his 65th birthday. To reach his goal, what must the contributions be? Assume a 5.00% interest rate.

Answer 1

Calculation of amount required at age 75:

Rate = 5%
PMT = $186,309
FV = $1,090,000
Nper = 85 - 75 = 10

PV can be calculated by using the following excel formula:
=PV(rate,nper,pmt,fv)
=PV(5%,10,-186309,-1090000)
= $2,107,794.16

Calculation of present value at age 65:

Rate = 5%
Nper = 75 - 65 = 10
FV = 2107794.16
PMT = 0

PV can be calculated by using the following excel formula:
=PV(rate,nper,pmt,fv)
=PV(5%,10,0,-2107794.16)
= $1,294,002.77

Calculation of annual contribution:

Rate = 5%
Nper = 65 - 25 = 40
FV = $1,294,002.77
PV = 0

Annual contribution can be calculated by using the following excel formula:
=PMT(rate,nper,pv,fv)
=PMT(5%,40,0,-1294002.77)
= $10,711.96

Annual contribution = $10,711.96