Question

Under the Amplitude Inc. deferred compensation plan, payments made at the end of each year accumulate up to retirement. The plan allows the retiree to specify over how many years payments are to be received. Assume Mark Jones has had $9,500 deposited at the end of each year for 30 years, and that the long-term interest rate has been 5%.  If Mark retires in 30 years, how much will he be able to withdraw each year if he elects to receive payments for 18 years, beginning on the day he retires? Round all calculations to the nearest dollar.

Answer 1

Future value of annuity = Annual amount*[{(1+r)^n - 1}/r]

Amount on the day of retirement = 9500*[{(1+5%)^30 - 1}/0.05]

= $631,169.05

Let the annual withdrawals be x

631,169.05 = x+x*PVAF(5%, 17 years)

631,169.05 = x+x*11.2741

x = $51,422.84

Hence, annual withdrawals will be $51,422.84