Question

You are planning for a very early retirement. You would like to retire at age 40 and have enough money saved to be able to draw $240,000 per year for the next 30 years (based on family history you think you'll live to age 70 You plan to save for retirement by making 10 equal annual installments from age 30 to age 40 into a fairly risky investment fund that you expect will earn 14% per ar. You will leave the money in this fund until it is completely depleted when you are 70 years old. Click the icon to view the present value annuity table.) (Click the icon to view the present value table.) Click the icon to view the future value annuity table.) (Click the icon to view the future value table.) To make your plan work answer the following questions (Click the icon to view the questions.) 1. How much money must you accumulate by retirement? (Hint: Find the present value of the $240,000 withdrawals.) Calculate the present value to find out how much money must be accumulated by retirement. (Round your answer to the nearest whole dollar.) The present value is $ 2. How does this amount compare to the total amount you will draw out of the investment during retirement? How can these numbers be so different? Over the course of your retirement you will be withdrawing S the present value. These numbers are different because 0 A. You need to have far more accumulated than what you will withdraw because you will withdraw a large portion of the investment every year-the balance remains invested where it ⓔ B. You need to have far less accumulated than what you will withdraw because you only withdraw a portion of the investment every year-te balance remains invested where it continues 1680720 continues to earn 14% interest. to earn 14% interest. You need to have the same accumulated as you will withdraw because you will not earn further interest on your investment when you reach retirement. None of the above ° C. O D. 3. How much must you pay into the investment each year for the first ten years? (Hint: Your answer from Requirement 1 becomes the future value of this annuity) (Round your answer to the nearest whole dollar.) You must pay $ 4. How does the total out-of-pocket savings compare to the investment's value at the end of the ten-year savings period and the withdrawals you will make during retirement? (Use the investment into the investment each year for the first ten years. rounded to the nearest whole number that you calculated above, then round your final answer to the nearest whole dollar.) The total out-of-pocket savings amounts to $ of ten years and remarkably lower ▼ than the amount of money you will eventually withdraw from the investment This is far ess than the investment's worth at the end

Answer 1

Solution:

Solution 1) Calculation of the Present Value of the money to be accumulated by retirement

Following are the steps to be followed on Microsoft Excel to calculate the Present Value:

Step 1: Click on "FORMULAS" tab at the top of Microsoft Excel
Step 2: Select the option "Financial"
Step 3: Under "Financial" select the option "PV"
Step 4: Insert Rate = 0.14    Nper = 30 PMT = -240000

PV = $1,680,639.39

Therefore, the Present Value of Money to be accumulated by retirement is $1,680,639

Solution 2) How does this amount compare to the total amount you will draw out of the investment during retirement?

Over the course of your retirement you will be withdrawing $7,200,000. However, by age of 40 you only need to have invested $1,680,639

These numbers are different because:

Correct Option is Option B: You need to have far less accumulated than what you withdraw because you only withdraw a portion of the investment every year – the balance remains invested where it continues to earn 14% interest.

Solution 3) Calculation of the amount you need to pay into the investment each year for the first 10 years

Following are the steps to be followed on Microsoft Excel to calculate the Annual Amount to be invested:

Step 1: Click on "FORMULAS" tab at the top of Microsoft Excel
Step 2: Select the option "Financial"
Step 3: Under "Financial" select the option "PMT"
Step 4: Insert Rate = 0.14    Nper = 10 PV = -1680639.39

PMT = $86,911.81

Therefore, the amount you need to pay into the investment each year for the first 10 years is $86,912

Solution 4: How does the total out of pocket savings compare to the Investment’s value at the end of the ten year savings period and withdrawals you make during the year

The out of pocket savings amount to $869,118. This is far less than the investment’s worth at the end of the ten years and remarkably lower than the amount of money you eventually withdraw from the investment.