Question

You just turned 23 years old and want to retire when you turn 65. You expect to live for 25 years after retirement and want to withdraw $90,000 per year in retirement, starting on your 65th birthday. You expect to earn a return of 7% on your investments every year.

1. What is the present value (as of your 65^th birthday) of the withdrawals you expect to make in retirement?

2. How much money should you save each year if you make the first deposit now and the last one one year before you turn 65?

Answer 1

1. Present value (as of your 65^th birthday) of the withdrawals you expect to make in retirement

=Withdrawal amount [ 1 - ( 1+ int rate )^-no of years ] / int rate

= 90000* [ 1 - 1.07^-25] / 0.07

= 1048822.49

2 .

Amount in 64th year = 1048822.49 / 1.07 = 980207.93

future value = Amount saved each year * [ ( 1+ int rate)^n -1 ] / int rate

980207.93 = P* [ 1.07^41 - 1 ] / 0.07

P = 4567.40

money should you save each year if you make the first deposit now and the last one one year before you turn 65 = 4567.40