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Homework answers / question archive / You just graduated from college and are starting your new job

You just graduated from college and are starting your new job

Finance

You just graduated from college and are starting your new job. You realized the importance to save for the future and have figured out that you will save $3,000 per quarter for the next 15 years; and then increase to $7,000 per quarter for the following 5 years. The amount accumulated at the end of these investments will be your retirement egg nest. You plan to start retirement and start withdrawing quarterly amounts the following quarter (you will be in retirement for 25 years). If your required rate of return is 12% compounded quarterly, how much are your quarterly withdrawals? 

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Computation of Quarterly Withdrawals:  
Future Value of the Annuity of $3000 at EOY 15   (3000*(1.03^60-1)/0.03) $489,160.31
Future Value of the above amount at EOY 20   (489160.31*1.03^20) $883,477.93
Future Value of the Annuity of $7000 at EOY 20   (7000*(1.03^20-1)/0.03) $188,092.62
Total accumulated amount in the retirement fund (883477.93+188092.62) $1,071,570.55
The total accumulated amount is the PV of the quarterly withdrawals  
to be made in 25 years [100 quarters]  
The quarterly withdrawals   (1071570.55*0.03*1.03^100/(1.03^100-1)) $33,911.64

Workings:

1 year = 4 quarters

Required Rate of Return per Quarter = 12%/4 = 3%

15 years * 4 = 60 quarters

5 years * 4 = 20 quarters

 

 

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