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Time Value of Money

Use nominal rate 4.8% compounded monthly:

(1) James and Jane retire with $500,000 in their retirement account. If they want that to last for 25 years, how much can they take out each month.

(2) Nick and Nora are 30 and intend to retire at age 65; they are just starting a retirement plan. How much must they deposit each month so that after retirement, they can draw out $3,500 each month for 20 years?

(3) Mick and Moira are 30 and intend to retire at age 65; they are just starting a retirement plan. How much must they deposit each month so that after retirement, they can take out $30,000 for a wild vacation and then draw out $3,500 each month for 20 years?

Solution Preview

Note: For the following answers the abbreviations have the following meanings

PVIFA= Present Value Interest Factor for an Annuity

It can be read from tables or calculated using the following equations
PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%

Use nominal rate 4.8% compounded monthly:

(1) James and Jane retire with $500,000 in their retirement account. If they want that to last for 25 years, how much can they take out each month.

We have the present value of an annuity
We have to calculate the annuity (equal payments spaced equally in time)

Frequency= M Monthly
No of years= 25
No of Periods= 300
Discount rate annually= 4.80% annual
Discount rate per period= 0.4000% Monthly
n= 300
r= 0.40%
PVIFA (300 periods, .4% rate ) = 174.520995

Present ...

Solution Summary

Calculates annuity (monthly withdrawals) from retirement account.

$2.19