Question

1a) You estimate that by the time you retire in 35 years, you will have accumulated savings of $2 million. If the interest rate is 3.5% and you live 20 years after retirement, what annual level of expenditure will those savings support? Unfortunately, inflation will eat into the value of your retirement income. Assume a 1.5% inflation rate and work out a spending program for your retirement that will allow you to increase your expenditure in line with inflation

Group of answer choices

$122,551

$140,722

$121,964

$130,309

1b) My spouse and I are each 50 and hope to retire in fifteen years. After retirement, we will receive $5,500 per month after taxes from our employers’ pension plans and $1,500 per month after taxes from Social Security. Unfortunately, our monthly living expenses are $15,000. Our social obligations preclude further economies. We have $1,000,000 invested in a high-grade, tax-free municipal-bond mutual fund. The return on the fund is 3% per year. We plan to make annual withdrawals from the mutual fund to cover the difference between our pension and Social Security income and our living expenses. How many years before we run out of money?

Group of answer choices

22.6 years

25.5 years

37.8 years

35.4 years

Answer 1

1a)

Second option is correct

1b)

living expenses per month = 15000

income = 5500 + 1500 = 7000

short fall = 15000 - 7000 = 8000 per month

annual shortfall = 8000*12 = 96000

Future value = present value*(1+r)^n

where r = rate of interest

n = number of periods

future value of 1,000,000 in 15 years will be at 3% interest rate = 1000000*(1+3%)^15 = 1,557,967.42

First option is correct

(formulas can be seen in formula bar.in case of any further explanation please comment)