Question

You are trying to decide how much to save for retirement. Assume you plan to save

$ 5000 per year with the first investment made one year from now. You think you can earn 11.5​%

per year on your investments and you plan to retire in 34​years, immediately after making your last $ 5000

investment.

a. How much will you have in your retirement account on the day you​ retire?

b.​ If, instead of investing $5,000 per​ year, you wanted to make one​ lump-sum investment today for your retirement that will result in the same retirement​ saving, how much would that lump sum need to​ be?

c. If you hope to live for 24 years in​ retirement, how much can you withdraw every year in retirement​ (starting one year after​ retirement) so that you will just exhaust your savings with the 24TH withdrawal​ (assume your savings will continue to earn 11.5​% in​ retirement)?

d.​ If, instead, you decide to withdraw $343,000 per year in retirement​ (again with the first withdrawal one year after​ retiring), how many years will it take until you exhaust your​ savings? (Use​ trial-and-error, a financial​ calculator: solve for​ "N", or​ Excel: function​ NPER)

e. Assuming the most you can afford to save is $1,000 per​ year, but you want to retire with $1,000,000 in your investment​ account, how high of a return do you need to earn on your​ investments? (Use​ trial-and-error, a financial​ calculator: solve for the interest​ rate, or​ Excel: function​ RATE)

Answer 1

Ans:- we will use the FV, PV, PMT, NPER, RATE functions of excel to find the answers from (a) to (e)

For (a) Rate=11.5%,Nper=34,Pmt=-$5,000,PV=0

For (b) Rate=11.5%,Nper=34,Pmt=0,FV=$1,716,947.26.

For (c) Rate=11.5%,Nper=24,PV=-1,716,947.26,FV=0

For (d) Rate=11.5%,Pmt=-$3423,000,PV=$1,716,947.26,FV=0

For (e) Nper=34,Pmt=-$1,000,PV=0,FV=-$1,000,000

Note:- Feel free to ask any doubt.