Question

Your sister turned 35 today, and she is planning to save $7,000 per year for retirement, with thefirst deposit to be made one year from today. She will invest in a mutual fund that's expected toprovide a return of 7.5% per year. She plans to retire 30 years from today, when she turns 65, and sheexpects to live for 25 years after retirement, to age 90. Under these assumptions, how much can shespend each year after she retires? Her first withdrawal will be made at the end of her first retirementyear.a.$58,601b.$61,686c.$64,932d.$68,179e.$71,588

Answer 1

She can spend c) $64.932 each year after she retires.

Explanation:

Calculate the accumulated sum after 30 years by using below formula:

S = R[(1+i)^n - 1]/i  

Where,

S = the accumulated sum

R = the yearly deposit

i = the decimal interest rate per year

n = the total count of deposits

This results in a sum accumulation of $723,796.

Now calculate annual payout for a 25-year old annuity by using below formula:

R = Pi/[1 - (1+i)^(-n)]  

This gives the PMT of $64,932.