Question

John Smith is 30 years old and graduated from CSUSM some years back, with a Business degree and an emphasis in Marketing. John is currently employed as a Marketing Manager at a well-known corporation. He has progressed well in his career, with the ultimate goal of becoming the company’s CEO. John’s current salary of $78,000 has increased at an average rate of 5% per year, with routine merit raises, and he expects it keep increasing. John’s firm, ABC Corporation, has a defined contribution plan (401k) plan in place.  Employees are allowed to contribute up to 15% of their gross annual salary. Unfortunately, John has not yet taken Professor Money Man’s advice to “Save, Start Young, and Pay Yourself First.” Instead, John has enjoyed his post-college, nice-salary life by leasing a new car, renting an apartment and going out to Player’s every weekend. Now that he has wedding plans on the horizon, John has come to the realization (with help from his fiancée, Jane Doe) that it’s time to start saving – while he’s still relatively young! John expects that the lovebirds’ two largest future expenses will be the cost of a wedding (short-term), then later the down payment on a house (intermediate-term). The couple plans to spend $10,000 of their own money on the wedding in twelve months. They also hope to purchase a $400,000 house within 5 years. Jane’s parents have promised to match their 10% down payment, but only if they manage to save it within 5 years. Finally, John would like to retire at age 60, since his own father died at age 59 and did not get to enjoy the fruits of his labor in retirement. Both future spouses agree that John will automate his savings by setting up monthly contributions to his wedding, house and 401k accounts.

5) Planning on an early retirement at age 60, John will start withdrawing from his 401k every month. He plans to start with $1,000,000 in his 401k, with a life expectancy of 85 years.  Assuming a rate of return on his account of 6% annually, how much can he withdraw every month for his retirement expenses? (HINT: use I/Y = 6%/12 = 0.5% monthly)

Your calculations will require the use of a financial calculator.  Please provide your detailed calculations, step-by-step, including calculator functions, in order to receive maximum credit – or partial credit if the final answer is incorrect.

Answer 1

Since he is retiring at 60 and with life expectancy of 85 years and he wants to withdraw every month So the number of withdrawals = (85-60) *12 300 Assuming he withdraws at the end of each month Present value at 60(PV) = 1,000,000 Number of withdrawals (N) = 300 Interest rate (1/Y) = 6%/12 Use the financial calculator to compute the value of PMT, monthly withdrawal 6,443.01