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Case narrative: A young couple, both 25 years old, are planning to retire in 40 years...

Case narrative:

A young couple, both 25 years old, are planning to retire in 40 years at the age of 65. After they retire, they expect to live for an additional 20 years, until age 85. They plan to begin saving for retirement today and based on information from their financial planner, they think they will earn 8% on their investment compounded annually. They think they will earn 5% on their retirement savings after they retire.

Question #1 answer: $1,295,283

Using the answer from question #1, this couple expects to earn 5% on their retirement funds beginning at age 65. If they live for another 20 years, how much can they withdraw each year, if they decide to leave $200,000 in their retirement account for their heirs?

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Answer #1

Retirement Account Value at age 65 (after 40 years) = $ 1295283 (answer from part1)

Tenure of Withdrawals = 20 years, Leftover in Account After 20 years = $ 200000 and Interest Rate = 5 %

Therefore, 1295283 = Present value of annual withdrawals + Present value of $ 200000 all discounted at the interest rate of 5 %

Let the annual withdrawals be $ K

Therefore, 1295283 = K x (1/0.05) x [1-{1/(1.05)^(20)}] + 200000 / (1.05)^(20)

1295283 = K x 12.4622 + 75377.9

K = (1295283 - 75377.9) / 12.4622 = $ 97888.4

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