Question

You are 30 years old today. You wish to retire at age 65. How much money must you deposit at the end of each year so that when you retire at age 65, you will be able to withdraw $2,500 at the end of each month until age 85?

You are 30 years old today. You wish to retire at age 65. How much money must you deposit at the end of each year so that when you retire at age 65, you will be able to withdraw $2,500 at the end of each month until age 85?

Assume you can earn interest at the rate of 5.5% compounded daily during the entire period from age 30 to 85.

 

Answer 1

Effective annual rate = (1+5.5%/365)^365 -1 = 5.65362

First compute the present value of funds at the time of retirement:

Using financial calculator

Input:

PMT = 2500

N = 20*12 = 240

I/Y = 0.0565362/12

Solve for PV as 358,889.74

This is the amount required at retirement.

Next compute the annual deposits to reach this target

Using financial calculator

Input:

FV = 358,889.74

N = 35

I/Y = 0.0565362

Solve for PMT as -3465.96

Hence the annual deposit will have to be $ 3465.96