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You are planning to save for retirement over the next 30 years
You are planning to save for retirement over the next 30 years. To do this, you will invest $800 a month in a stock account and $400 a month in a bond account. The return of the stock account is expected to be 10%, and the bond account will pay 6%. When you retire, you will combine your money into an account with a 9% return.
How much can you withdraw each month from your account assuming a 25-year withdrawal period? Assume that the APR is compounded monthly. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)
Withdrawal per month?
Expert Solution
First we calculate Future Value of Stock Account and Bond Account using FV Function in Excel:
=-fv(rate,nper,pmt,pv)
For Stock Account:
Here,
FV = Future Value = ?
Rate = 10%/12 = 0.833%
Nper = 30 years*12 months = 360 months
PMT = $800 per month
PV = 0
Substituting the values in formula:
=-fv(0.833%,360,800,0)
FV or Future Value = $1,808,390.34
For Bond Account:
Here,
FV = Future Value = ?
Rate = 6%/12 = 0.50%
Nper = 30 years*12 months = 360 months
PMT = $400 per month
PV = 0
Substituting the values in formula:
=-fv(0.50%,360,400,0)
FV or Future Value = $401,806.02
Total Combined Value = $1,808,390.34 + $401,806.02 = $2,210,196.36
Now we calculate Monthly Withdrawal using PMT Function in Excel:
=pmt(rate,nper,-pv,fv)
Here,
PMT = Monthly Withdrawal = ?
Rate = 9%/12 = 0.75%
Nper = 25 years*12 months = 300 months
PV = $2,210,196.36
FV = 0
Substituting the values in formula:
=pmt(0.75%,300,-2210196.36,0)
PMT or Monthly Withdrawal = $18,547.89
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