Question

Tabitha saved $400,000 for retirement. She wants to withdraw part of that money from her retirement account each month and wants it to last 20 years. Her account has a 6% interest rate. Use the payout annuity formula to calculate how much she will be able to withdraw each month for those 20 years. When solving, round numbers to the nearest hundred-thousandth. Round your final answer to the nearest cent.

a. $2,368.00
b. $1,766.67
c. $1,666.67
d. $2,865.74

Answer 1

Using the payout annuity formula, Tabitha can withdraw approximately $2,865.74 each month from her retirement account for 20 years at a 6% interest rate.

Step-by-step explanation:

To determine how much Tabitha can withdraw each month from her retirement account for 20 years at an interest rate of 6%, we use the payout annuity formula: PMT = P * [r(1+r)n] / [(1+r)n - 1], where PMT is the monthly payment, P is the principal amount, r is the monthly interest rate, and n is the total number of payments.

In Tabitha's case, P = $400,000, r = 0.06/12 (since 6% is the annual rate and we want the monthly rate), and n = 20*12 (since she wants the money to last 20 years with monthly withdrawals). Plugging these into the formula:

PMT = 400,000 * [0.005(1+0.005)240] / [(1+0.005)240 - 1]

Calculating this gives us a monthly withdrawal amount of approximately $2,865.74.

Therefore, Tabitha will be able to withdraw $2,865.74 each month from her retirement account for 20 years.