Question

Mark Gandalla, a young engineer at John Deere, plans to retire 35 years from now. He expects that he will live another 25 years after retiring. Mark wants to have enough money upon reaching retirement age to withdraw $120,000 from the account at the end of each year he expects to live, and yet still have $1,000,000 left in the account at the time of his expected death (60 years from now).

Mark Gandalla plans to accumulate the retirement fund by making equal annual deposits at the end of each year for the next 35 years. He expects to earn 11% per year on his deposits. However, he only expects to earn 5% per year on his investment after he retires since he will choose to place the money in less risky investments. What equal annual deposits must Mark Gandalla make each year to reach his retirement goal?

Answer 1

As per the question Mark Gandalla plans to retire 35 years from now

He expects to live another 25 year after retirement

After retirement he wishes to get $120,000 every year he expects to live

And have $1,000,000 in account at the time of his expected death

Mark Gandalla expects to earn 5% per year on his investment

The present worth of retirement fund is = $120,000(P/A,5%,25) + $1,000,000(P/F,5%,25)

The present worth of retirement fund is = $120,000(14.094) + $1,000,000(.2953)

The present worth of retirement fund is = $1691280 + $295300

The present worth of retirement fund is = $1986580

Though Mark Gandalla expects to earn 11% per year on his deposits

So the required annual deposits is = $1986580(A/F,11%,35)

So the required annual deposits is = $1986580(0.0029)

So the required annual deposits is = $5761.082 or Approx $5761

Mark Gandalla should deposit $5761 to reach his retirement goal