Question

You are 62 and you wish to retire. Your retirement account totals $500,000. What percentage should you be able to withdraw from your account for perpetuity. What is the dollar amount?

Given the information above if you decide to wait until 70 to retire. The expected return is 9%, based on the rule of 72 what dollar amount will you be able to withdraw from your account for perpetuity?

Answer 1

Compute the dollar amount of withdrawal, using the equation as shown below:

Annual withdrawals = Balance in retirement account*Expected return

                                 = $500,000*9%

                                 = $45,000

Hence, the annual withdrawals are $45,000.

Compute the withdrawal percentage, using the equation as shown below:

Withdrawal percentage = Annual withdrawals/ Balance in retirement account

                                      = $45,000/ $500,000

                                      = 9%

Hence, the annual withdrawal percentage is 9%.

Compute the time taken to double the investment, using the equation as shown below:

Time taken = 72/ Expected return

                   = 72/ 9

                   = 8 years

Hence, the time taken to double the investment is 8 years.

The retirement account balance at the age of 62 is $500,000. If an individual decides to retire at 70 years, then such an individual needs to hold for 8 years. As per the rule of 72 an individual requires 8 years to double the investment. Thus, the retirement account balance at the age of 70 years is $1,000,000.

Compute the dollar amount of withdrawal, using the equation as shown below:

Annual withdrawals = Balance in retirement account*Expected return

                                 = $1,000,000*9%

                                 = $90,000

Hence, the annual withdrawals are $90,000.