Question

You must show your work for credit. Simply giving the final answer is not sufficient; you must explain and show how you arrived at each answer. Ignore all taxes in your

Your sister turned 20 today. She is planning to save $5,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that's expected to provide a return of 7% per year, compounded annually. She plans to retire 40 years from today, when she turns 60, and she expects to live for 25 years after retirement, to age 85. Under these assumptions, how much can she spend each year after she retires without running out of money, if she can earn 9% per year (again, compounded annually) on her investments during her retirement? Assume that her withdrawals also occur at the end of the year (so her first withdrawal will be made at the end of her first retirement year).

Answer 1

First we have to find the accumulated value after 40 years with FV function in EXCEL

=FV(rate,nper,pmt,pv,type)

rate=7%

nper=number of periods=40

pmt=5000

pv=0

type=0

=FV(7%,40,-5000,0,0)

FV=$998,176

The accumulated value after 40 years=$998,175.56

==>Now we have to find the annual withdrawls for 25 years with PMT function in EXCEL

=PMT(rate,nper,pv,fv,type)

rate=9%

nper=25

pv=998,175.56

fv=0

type=0

=PMT(9%,25,998175.56,0,0)=$101,620.51

The annual withdrawls for 25 years=$101,620.51