Question

PROBLEM 7 – Time-Value-of-Money and Retirement Planning

Ellen is 30 years old and plans to start saving $10,000 annually, toward her retirement. She will put the $10,000 into an investment account at the end of each year. She will put this savings into a mutual fund. She intends to retire in 35 years. Upon her retirement, she will move her savings, (i.e. her “nest egg”) into a relatively low-risk account that earns 4.0% annually. Her first withdrawal will be made one year after her retirement and she expects to withdraw $100,000 from the account at the end of each year for 25 years thereafter (i.e. she wants to have enough annual income to last at least until she reaches age 90).

What return (i.e. interest rate) must Ellen earn on her investment account during the next 35 years, while she is saving for her retirement? In other words, what rate of return must the account provide Ellen while she is building up her “nest egg?”

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.