Question

You want to be able to withdraw $25,000 from your account each year for 20 years after you retire.

Answer 1

Answer:

When using formulas in application, or memorizing them for tests, it is helpful to note the similarities and differences in the formulas so you don’t mix them up. Compare the formulas for savings annuities vs payout annuities.

Savings Annuity Payout Annuity

P

N

=

d

(

(

1

+

r

k

)

N

k

−

1

)

(

r

k

)

P

0

=

d

(

1

−

(

1

+

r

k

)

−

N

k

)

(

r

k

)

PAYOUT ANNUITY FORMULA

P

0

=

d

(

1

−

(

1

+

r

k

)

−

N

k

)

(

r

k

)

P0 is the balance in the account at the beginning (starting amount, or principal).

d is the regular withdrawal (the amount you take out each year, each month, etc.)

r is the annual interest rate (in decimal form. Example: 5% = 0.05)

k is the number of compounding periods in one year.

N is the number of years we plan to take withdrawals