P5 - 24

Funding your retirement Emily Jacob is 45 years old and has saved nothing for retire-ment. Fortunately,
she just inherited $75,000. Emily plans to put a large portion of that money into an investment account
earning an 11% return. She will let the money accumulate for 20 years, when she will be ready to retire.
She would like to deposit enough money today so she could begin making withdrawals of $50,000 per
year starting at age 66 (21 years from now) and continuing for 24 additional years, when she will make
her last withdrawal at age 90. Whatever remains from her inheritance, Emily will spend on a shopping
spree. Emily will continue to earn 11% on money in her investment account during her retirement years,
and she wants the balance in her retirement account to be $0 after her withdrawal on her ninetieth
birthday.

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a. How much money must Emily set aside now to achieve that goal? It may be help-ful to construct a

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timeline to visualize the details of this problem.

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b. Emily realizes that once she retires she will want to have less risky investments that will earn a
slightly lower rate of return, 8% rather than 11%. If Emily can earn 11% on her investments from

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now until age 65, but she earns just 8% on her investments from age 65 to 90, how much money
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does she need to set aside today to achieve her goal?

c. Suppose Emily puts all of the $75,000 that she inherited into the account earning 11%. As in part b,
she will earn only an 8% return on her investments after age 65. If Emily withdraws $50,000 as
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planned on each birthday from age 66 to age 90, how much will be left in her account for her heirs
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after her last withdrawal?

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Answer:
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a. PMT = $ 50,000 Retirement income

r = 11% Interest rate
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n = 24 Retirement period
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PVIFA (r,n) = ( 1 - ( 1 + r )^-n ) / r

Investment Value = PMT * PVIFA(11%,24)
= $50,000 * (1-(1+11%)^-24)/11%
= $ 417,406.83

Investment Value (IV) = $ 417,406.83

Interest rate r = 11%
Investment period n = 20 years

PVIF (r,n) = ( 1 + r )^-n

Investment Value = HV * PVIF(11%,20)

https://www.coursehero.com/file/38217205/FIN-504-M3-P5-24pdf/
 = $417,406.83 * (1+11%)^-20
= $ 51,772.60

To achieve her goal Emily must set aside $51,772.60.

b. Retirement income PMT = $50,000

Interest rate r= 8%
Retirement period n= 25 years

PVIFA (r,n) = ( 1 - ( 1 + r )^-n ) / r

Investment Value = PMT * PVIFA(8%,25)

= $50,000 * ( 1 - ( 1 + 8% )^-25 ) / 8%
= $ 533,738.81

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Investment Value IV = $533,738.81

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Interest rate r= 8%

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Investment period n= 20 Years

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rs ePVIF (r,n) = ( 1 + r )^-n
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Present Value = IV * PVIF(8%,20)
= $533,738.81 * ( 1 + 8% )^-20
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= $ 114,512.70
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To achieve her goal Emily must set aside $114,512.70

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c. Present Value IV = $75,000

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Interest rate r = 11%

Investment period n= 20 Years
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FVIF (r,n) = ( 1 + r )^n

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Investment Value = PV * FVIF ( 11%,20)

IV = $75,000 * ( 1 + 11% )^20
IV = $ 604,673.37

Calculate the Remaining balance on her retirement income

Investment Value IV = $604,673.37

Retirement income PMT = $50,000
Interest rate r= 8%
Retirement period n= 24 Years

https://www.coursehero.com/file/38217205/FIN-504-M3-P5-24pdf/
FVIF(r,n) = ( 1 + r )^n
 FVIFA(r,n) = ( ( 1 + r )^n -1 ) / r

Remaining balance = IV * FVIF( 8%, 24) - PMT * FVIFA(8%,24)

IV = $604,673.37 * ( 1 + 8% )^24 - $50,000 * ( ( 1 + 8% )^24 - 1 ) / 8%
IV = $496,105.17

The amount that Emily will leave for her heirs after her last withdrawal is $496,105.17.

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