Question

You are planning to save for retirement over the next 20 years. To do this, you will invest $600 a month in a stock account and $300 a month in a bond account. The return of the stock account is expected to be 11 percent, and the bond account will pay 6 percent. When you retire, you will combine your money into an account with a return of 9 percent. How much can you withdraw each month from your account assuming a 15-year withdrawal period? Multiple Choice $279,858.5 $6,807.3 $6,540.35 $6,673.82 $80,085.89

Answer 1

A. Calculation of Future Value after 20 years of $600 per month investment in stock @ 11% p.a. :

• Future Value = Present Value * [1+(rate/12)]time*12

Future Value = $600 * [1+(0.11/12)]20yeras*12

Future Value = $519,383

B. Calculation of Future Value after 20 years of $300 per month investment in bond @ 6% p.a. :

Future Value = $300 * [1+(0.06/12)]20years*12

Future Value = $138,612

C. Therefore, amount available for investment after 20 years :

= $519,383+$138,612

= $657,995

D. Calculation of monthly withdrawal amount :

• Monthly reurn on investmen = 9%/12 = 0.75%
• Period in months = 15years *12 = 180 months

PVAF(180 months, 0.75%) = 98.5934

Therefore, monthly withdrawal amount = $657,995/98.5934

= $6,673.82 per month

Hence, $6,673.82 is the correct choice.