Question

If you invest $350,000 today at 8%, how large of withdrawal can you make each year if you want the withdrawals to last forever? What if the first withdrawal were in 5 years?

Answer 1

- Amount Invested today = $350,000

Interest Rate = 8%

Calculating the amount of withdrawal for each year forever:-

Present Value = Annual Withdrawal/Interest Rate

$350,000 = Annual Withdrawal/8%

Annual Withdrawal = $28,000

So, the large amount of withdrawal each year forever is $28,000

- As the First withdrawal started in 5 th year, the Amount Invested today will earn Interest for first 4 years without withdrawal being made.

Amount accumulated till 4th year = Amount Invested(1+Interest Rate)^4

=$350,000*(1+0.08)^4

= $350,000*1.36048896

= $ 476,171.14

Now, Calculating Annual Withdrawals that will be started from 5 th year :-

Present Value = Annual Withdrawal/Interest Rate

$476,171.14 = Annual Withdrawal/8%

Annual Withdrawal = $38,093.69

So, the large amount of withdrawal each year forever if first withdrawal started from 5th year is $38,093.69