Question

You have $250,000 in an IRA individual Retirement Account at the time you retire. You have the option this money in two funds: Fund A pays 2.8 annually and Fund B pays 78% annually. How should you divide your money between Fund A and Fund B to produce an annual interest income of $10,000? of investing?

Answer 1

So to start off with this problem, let us call the amount invested in Plan A and B as a and b respectively.

So equation 1: a + b = 250,000

Next, we need to get an equation which is equal to 10,000. So the interest rate in plan a + interest rate in plan b would be equal to 10,000. Rewriting this sentence will give us:

Equation 2: .028a + 0.078b = 10,000

Rewrite the first equation into a = 250,000 - b, and then plug the value into equation 2.

.028(250,000 - b) + 0.078b = 10,000

7,000 - 0.028b + 0.078b = 10,000
-0.028b + 0.078b = 10,000 - 7,000
0.05b = 3,000
b = $60000 amount invested at 2.8% while 
250,000 - 60,000 = $190,000 is the amount invested at 7.8%