Question

1. Kraft Foods executives have 15,000 dollars placed in their 401K retirement program at the end of each year as part of their compensation.  John Trump has worked for Kraft for 25 years and his 401K plan has had an average annual return of 10% per year.

1. What is the total value of Trump’s 401K account?

2. Trump retires at the end of his twenty-fifth year and begins withdrawing from the account.  He expects to live another twenty years.  If the account continues to earn 10% while funds are still on deposit, how much will each annual withdrawal (as an ordinary annuity) be?  Hint:  Part (b) is asking you to compute PMT.

3. Trump wants to leave one million dollars to his nephew when he dies in twenty years.  If the account still earns 10%, how much will he be able to withdraw each year and still leave the desired inheritance in twenty years, assuming he dies on schedule? Hint:  First, compute the present value of one million dollars today (twenty years before he dies).  
4. Second, take that amount off the balance of his 401K account today (which you computed in Part (a)).
5. Third, recalculate how much he will be able to withdraw each year (which you computed in Part (b)).

Answer 1

Future value of saving after 25 years using Future value annuity =15000*(10% 25yrs- that is 108) so future value is 1,625,206

Using PMT formula he can withdraw 15222 PMT

Similarly leaving 1million he can withdraw 11055

PMT formula = Principal * (interest rate/Number of years) / (1-(1+interest rate/Number of years)raise to minus number of year*number of payments