Question

Mary wants to withdarw $100,000 a year for 20 years from her IRA account. She expects to retire with $1,000,000 is her IRA account

About what interest rate must she eam on the IRA account?
a. 6.38%
b. 7.75%
c. 4.46%
d. 100%

Answer 1

To calculate the interest rate, we can use the concept of annuity. By plugging the values into the formula, we find that the interest rate is approximately 4.46% (option c).

Step-by-step explanation:

To calculate the interest rate, we can use the concept of annuity. An annuity is a series of equal payments made at regular intervals. In this case, Mary wants to withdraw $100,000 a year for 20 years. We can use the formula for the present value of an annuity to solve for the interest rate.

The present value of an annuity formula is:

PV = C * (1 - (1+r)^-n) / r

Where PV is the present value, C is the annual payment, r is the interest rate, and n is the number of years.

In this case, PV is $1,000,000, C is $100,000, and n is 20. By plugging these values into the formula, we can solve for r. After calculating, we find that the interest rate is approximately 4.46% (option c).