Question

Suppose you are 35 years old and would like to retire at age 60. Furthermore, you would like to have a retirement fund from which you can draw an income of ​$150,000 per year-​forever! How much would you need to deposit each month to do​ this? Assume a constant APR of 8% and that the compounding and payment periods are the same.

To draw $150,000 per​ year, there must be ​$___ in your savings account when you retire.

You can reach your goal by making monthly deposits of $___.

Answer 1

To draw $150,000 per year forever, the amount that must be in the savings account is calculated using the present value of perpetuity equation

There must be ​$ 1,875,000 in your savings account when you retire.

------------------------------------------------------------------------------

The monthly deposit to be made is found using the future value of annuity equation

Solving for the value of A in the above equation,

A = $ 1971.55

The goal can be reached by making monthly deposits of $ 1971.55