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Homework answers / question archive / You are planning to save for retirement over the next 30 years

You are planning to save for retirement over the next 30 years

Finance

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?

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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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