Question

You plan to retire from American Widgets Incorporated at age​ 65, and you want to have enough money in your savings account to withdraw​ $40,000 every year for 20 years after that. If your account earns​ 8% interest per​ year, how much do you need in it when you turn​ 65?

How much do you need in it when you turn​ 65?

Answer 1

Annual withdrawal = $40,000
Period = 20 years
Interest rate = 8%

Amount needed at retirement = $40,000/1.08 + $40,000/1.08^2 + … + $40,000/1.08^19 + $40,000/1.08^20
Amount needed at retirement = $40,000 * (1 - (1/1.08)^20) / 0.08
Amount needed at retirement = $40,000 * 9.818147
Amount needed at retirement = $392,725.88

So, you need $392,725.88 in the fund when you turn 65.