Question

You believe you must withdraw $12,000 per month during retirement. You plan to be retired for 30 years. Assuming your money will earn 4.5% during retirement and also assuming that you will not adjust your withdrawals for inflation, how much money will you need to have on hand on the day you retire, in order to fund your retirement?

Answer 1

Answer:

$2,385,086

Explanation:

To answer this question, we need to use the present value of an ordinary annuity formula:

$PV = A ((1-(1+i)^{-n} )/i)$

Where:

• A = Value of the annuity
• i = interest rate
• n = number of compounding periods

Because the interest rate is annual, it is convenient to convert it to a monthly rate.

4.5% annual rate = 0.37% monthly rate.

The number of compounding periods will be = 12 months x 30 years

                                                                            = 360 months

Now, we simply plug the amounts into the formula:

$X = 12,000((1-(1 + 0.0037)^{-360} )/0.0037)$

$X = 2,385,086$

You will need to have saved $2,385,086 if you plan to retire under the aforementioned circumstances.