You want to be able to withdraw $40,000 from your account each year for 30 years after you retire. If you expect to retire in 20 years and your account earns 7.

Question

You want to be able to withdraw $40,000 from your account each year for 30 years after you retire. If you expect to retire in 20 years and your account earns 7.8% interest compounded annually:

 

a) How much will you need to have when you retire?

 

b) How much will you need to deposit each year until retirement to achieve your retirement goals?

Answer 1

1. in order to withdraw $40,000 per year for 30 years, it is necessary to have $40,000/year x 30 years = $1,200,000

 

2. to figure the annual deposit, which plus annual interest would amount to $1,200,000, it is necessary to use the formula

 

Future value =  Principal x[ (1 + Interest)^t - 1 ) / Interest]

 

$1,200,000 = P [ (1.078)²⁰ - 1) / 0.078]

 

$1,200,000 = P(44.756)

 

$26,810 ≅ P