Question

For Arash to be able to withdraw $2000 from the RRSP at the beginning of every month during his planned 20-year retirement period, what does the nominal interest rate, compounded monthly, need to change to, assuming the interest rate during the 25-year savings period remains unchanged at 5.4% compounded monthly?

a. 6.2%
b. 5.4%
c. 4.8%
d. 7.0%

Answer 1

To figure out the needed nominal interest rate for Arash's RRSP withdrawals, one must understand annuities and the time value of money. The right rate allows for $2000 monthly withdrawals over 20 years, given the 25-year savings at 5.4%, compounded monthly.

Step-by-step explanation:

For Arash to withdraw $2000 from the RRSP at the beginning of every month during his 20-year retirement period, we need to determine the appropriate nominal interest rate, compounded monthly. The current 5.4% interest rate during the savings phase is not going to change, and we are trying to find the rate that would allow the mentioned withdrawals in retirement. This question involves understanding annuities and the time value of money.

To solve this, a financial calculator or annuity formula could be used, but the question only requires selecting the correct answer from given options. In reality, detailed calculations would involve using the present value of annuity formula to determine the required interest rate based on the future value of the RRSP at the time of retirement, the withdrawal amount, and the period of the annuity.