Question

You are 30 and have decided you need to start saving for retirement in your 401(k) by depositing $1,325 per month. You are splitting your money between two investment options: 60% in Fund Aggressive which is expected to earn 10.5% annually and 40% in Fund Conservative which is expected to earn 5% annually. Once you retire at 65 and want to be sure that your spending lasts for 30 years. How much can you spend per month in retirement. Assume a 6% discount rate in retirement.

Answer 1

Investment in aggressive = 1,325 x 60% = 795, Investment in conservative fund = 1,325 x 40% = 530

Value of funds in 35 years can be calculated using FV function

N = 35 x 12 = 420, I/Y = 10.5%/12, PMT = 795, PV = 0

=> Compute FV = $3,436,497 is the value of aggressive fund

Similarly, N = 35 x 12 = 420, I/Y = 5%/12, PMT = 530, PV = 0

=> Compute FV = $602,129 - conservative fund

=> Total Corpus = $4,038,626

Monthly withdrawal can be calculated using PMT function

N = 30 x 12 = 360, PV = 4,038,626, FV = 0, I/Y = 6%/12

=> Compute PMT = $24,213.61 is the monthly amount you can spent.