Question

You save for retirement over 30 years by investing $850/month in a stock account that yields 10%. You invest $350/month in a bond account that yields 6%. At retirement you combine both accounts into a new account that yields 5%. How much can you withdraw each month assuming a 25 year withdrawal period?

Answer 1

$13,287.70

Explanation:

The future value of the stock account is computed as the sum of a geometric series. This computation assumes that the annual yield is compounded monthly.

FV = p((1+r/12)^(12n) -1)/(r/12)

For the stock account, p=850, r=0.10, n=30, so the future values is ...

FV = 850((1+.10/12)^360-1)/(.10/12)) = 1,921,414.74

For the bond account, p=350, r=.06, n=30, so the future value is ...

FV = 350((1+.06/12)^360 -1)/(.06/12) = 351,580.26

The combined account value at the end of 30 years is ...

$1,921,414.74 + 351,580.26 = $2,272,995.00

_____

The monthly payment that can be made over a 25 year period is given by the amortization formula.

A = P(r/12)/(1 -(1 +r/12)^(-12n))

= $2,272,995.00(.05/12)/(1 -(1+.05/12)^-300) = $13,287.70

You can withdraw $13,287.70 each month assuming a 25-year withdrawal period.