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Homework answers / question archive / Josh has just retired and has received a lump sum pay-out of $1,500,000
Josh has just retired and has received a lump sum pay-out of $1,500,000. He invests part of this pay-out on an investment property which earns 3 percent per annum and provides a perpetual income to him of $40,000 per year (assuming end-of-year withdrawals). He puts the rest of the pay out in another investment in the form of an annuity which earns 4 percent per annum. He wants to make equal annual withdrawals over the next 10 years from this investment annuity, to fund some overseas trips and a few other extravagances, leaving a balance of zero,
Required
(i) Calculate how much Josh has invested in the investment property.
(ii) Show how much extra Josh can expect to spend each year (assuming end-of-year withdrawals), over and above the $40,000 from the property investment, for the next 10 years from the investment annuity. Note: ignore tax in your calculations.
1.Computation of Josh has invested in the Investment Property:
Amount Invested in Investment Property = $40,000/3%
Amount Invested in Investment Property = $1,333,333.33
2.Computation of Annual Payment:
Amount Invested in Annuity = $1,500,000 - $1,333,333.33 = $166,666.67
Computation of Annual Payment using PMT Function in Excel:
=pmt(rate,nper,-pv,fv)
Here,
PMT = Annual Payment = ?
Rate = 4%
Nper = 10 Years
PV = $166,666.67
FV = 0
Substituting the values in formula:
=pmt(4%,10,-166666.67,0)
PMT or Annual Payment = $20,548.49
So, Annual payment from Annuity = $20,548.49
So, Jack can spend $20,548.49 above $40,000 from investment property.
