Question

Adam’s fellow graduate, Jenna Hawthorne, was lucky. Her parents gave her a car for graduation. Okay, it was a little Hyundai, and definitely not her dream car, but it was serviceable, and Jenna didn’t have to worry about buying a new car. In fact, Jenna has been trying to decide how much of her new salary she could save. Adam knows that with a hefty car payment, saving for retirement would be very low on his priority list. Jenna believes she could easily set aside $3250 of her $50,000 salary. She is considering putting her savings in a stock fund. She just turned 22 and has a long way to go until retirement at age 65, and she considers this risk level reasonable. The fund she is looking at has earned an average of 8% over the past 15 years and could be expected to continue earning this amount, on average. While she has no current retirement savings, five years ago Jenna’s grandparents gave her a new 30-year U.S. Treasury bond with a $10,000 face value. Jenna wants to know her retirement income if she both (1) sells her Treasury bond at its current market value and invests the proceeds in the stock fund and (2) saves an additional $3250 at the end of each year in the stock fund from now until she turns 65. Once she retires, Jenna wants those savings to last for 30 years until she is 95.

a. Suppose Jenna sells the bond, reinvests the proceeds, and then saves as she planned if, indeed, Jenna earns a 8% annual return on her savings, how much could she withdraw each year in retirement? (Assume she begins withdrawing the money from the account in equal amounts at the end of each year once her retirement begins.)

Answer 1

To calculate the retirement income Jenna could withdraw each year, we need to consider both the proceeds from selling her Treasury bond and her annual savings in the stock fund. Assuming she sells her bond for $10,000 and saves an additional $3,250 annually in the stock fund for 43 years, her retirement income can be estimated by dividing the total amount saved by the number of years she expects to live in retirement.

Step-by-step explanation:

To calculate the retirement income Jenna could withdraw each year, we need to consider both the proceeds from selling her Treasury bond and her annual savings in the stock fund.

The current market value of the bond is not provided, so we cannot calculate the exact amount. However, let's assume Jenna sells her bond for $10,000 and invests the proceeds in the stock fund which earns an average of 8% annually.

If Jenna saves an additional $3,250 at the end of each year for 43 years, from age 22 to 65, and earns 8% on her savings, she will have a substantial amount by retirement.

Assuming Jenna starts withdrawing the money from the account in equal amounts at the end of each year once her retirement begins, her annual retirement income can be estimated by dividing the total amount she saved by the number of years she expects to live in retirement.

It's important to note that this calculation does not account for inflation or changes in the stock market, so the actual retirement income could differ.