You inherit $300,000 from your parents and want to use the money to supplement your retirement....
Question:
You inherit $300,000 from your parents and want to use the money to supplement your retirement. You receive the money on your 65th birthday, the day you retire. You want to withdraw equal amounts at the end of each of the next 20 years. What constant amount can you withdraw each month and have nothing remaining at the end of 20 years if you are earning 7% interest compounded monthly?
a. $1,829
b. $1,200
c. $2,326
d. $2,943
Annuity:
An annuity provides investors a guidance to construct a savings plan for future expenditures. In detail, an investor can determine the required periodic savings amount to achieve a financial goal after a fixed number of periods.
Answer and Explanation: 1
The answer is c. $2,326
Summary:
- Balance = $300,000
- Number of withdrawals (N) = 20 x 12 = 240
- Annual interest rate (I) = 7%, monthly compounding
Determine the monthly withdrawal (PMT):
{eq}Balance = \displaystyle PMT\times\frac{1-(1 + \displaystyle\frac{I}{12})^{-N}}{\displaystyle\frac{I}{12}} {/eq}
{eq}$300,000 = \displaystyle PMT\times\frac{1-(1 + \displaystyle\frac{7\%}{12})^{-240}}{\displaystyle\frac{7\%}{12}} {/eq}
{eq}PMT= $2,326 {/eq}
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What is Annuity? - Definition & Formula
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Chapter 2 / Lesson 7
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Learn about annuities. Understand what an annuity is, examine the annuity formula and learn how to calculate its future value, and see examples of annuities.
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