Question

Beth has just received an inheritance of $500,000 and would like to be able to make quarterly withdrawals over the next 20 years. She decides on an annuity that pays 6.4%, compounded quarterly. How much will her quarterly payments be to draw the account down to zero at the end of 20 years? Quarterly Payments =​

Answer 1

The amount Beth would be able to withdraw quarterly from her inheritance over the next 20 years is Quarterly Payments ≈ $11,124.53

The given parameters in the question;

Present value of inheritance, PV = $500,000

The number of years of withdrawal, n = 20 years

Interest rate, i = 6.4%

The required parameter;

The amount Beth would be able to withdraw quarterly over the next 20 years to draw the account down to zero, given a quarterly interest rate of 6.4%

Method

The required parameter is given by the payment formula

The question is related with annuity given that withdrawals will be made quarterly

The question seeks to find how much she can withdraw so as to exhaust the balance in 20 years

The amount she can withdraw quarterly is given by the payment formula as follows;

$\mathbf{PMT = PV \times \dfrac{i}{1 - \left(1 + i\right)^{-n}}}$

Where;

PMT = The amount of quarterly payments

PV = The present value of the investment = $500,000

i = The interest rate = 6.4%

n = The number of years = 20 years

Therefore, we get;

$\mathbf{PMT = 500,000 \times \dfrac{\dfrac{0.064}{4} }{1 - \left(1 + \dfrac{0.064}{4} \right)^{-4 \times 20}} \approx 11,124.53}$

The amount she can withdraw quarterly for the next 20 years ≈ $11,124.53

Quarterly payment, PMT = $11,124.53

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