Question

Suppose that you anticipate that you will retire one year from now. (Hence, your first payout will be in one year.) You have saved $500,000 in your 401(k) account up until now. You plan to invest today in a conservative portfolio that has an estimated rate of return of 5% per year with annual compounding. You would like this portfolio to last 25 years. Suppose that you plan to withdraw equal dollar amounts each year. Under these assumptions, which of the following calculations is the best one for calculating your projected annual payout? C=- 500,000 1-(1-0.05)-25 0.05 = 500,000 C = 500.000 1-(110.05)-25 0103 OCE 500,000 11 +0.05) as 0.05

Answer 1

this can be solved using present value of annuity formula

present value of annuity = C [1 - (1 + r)^-n / r ]

where C = equal annual dollar amounts

r = rate of return = 5%

n = number of years = 25

at present we have got 500,000 this is present value of annuity

so , 500,000 = C [1 - (1 + 0.05)^-25 / 0.05]

C = 500,000 / [1 - (1 + 0.05)^-25 / 0.05]

(first option is correct one)