Question

I want to retire in 40 years. When I retire, I want to withdraw $20,000 every 6 months from my savings for a period of 10 years. However, at the end of years two and three in my retirement, I will need to spend $40,000 and $60,000 respectively to send my grandson to culinary school. Assuming I can earn 4% compounded semi-annually, answer the following question:

How much money will I need at year 40 to fund sending my grandson to culinary school?

Answer 1

Amount needed at year 40 year to fund sending grandson to culinary school is the sum of the following:

(i ) Present Value of $40,000 discounted for 2*2= 4 half years

(ii ) Present value of $60,000 discounted for 3*2 = 6 half years.

Given interest rate= 4% per year or 2% per half year.

Amount needed after 40 years to fund sending to Culinary School

= 40,000*(PVIF 2% ,4) + 60,000*(PVIF 2%, 6)= $40,000*0.923845 + $60,000*0.8880

= $36,963.80 + $53,278.86 = $ 90,232.66