With $500,000 retirement saving, the amount that can be withdrawn monthly over 20 years is $3,029.
The amount withdrawn each month can be computed using formula for the present value of an annuity.
P = PMT . [(1 - (1 + r)ⁿ] / r
Where:
P = present value
PMT = the amount of money withdrawn at each period.
r = interest rate
n = number of periods in which withdrawal or payment will be made.
The withdrawal is monthly, hence, we need to divide the annual interest rate by 12.
r = 0.04/12 = 0.0033
Number of periods in which withdrawal or payment will be made is equal to 20 years times 12 months:
n = 12 x 20 = 240
The present value is the saving, that is:
P = $500,000
Substitute those parameters into the formula and solve for PMT.
P = PMT . [(1 - (1 + r)ⁿ] / r
500,000 = PMT [(1 - (1 + 0.0033)²⁴⁶] / (0.0033)
PMT = $3,029
Therefore, for the give scheme, the amount to be pulled out monthly is $3,029.
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