Final answer:
Using the payout annuity formula, Tabitha can withdraw approximately $2,868.20 monthly for 20 years with her $400,000 retirement savings at a 6% interest rate, which is closest to answer choice A) $2,680.92.
Step-by-step explanation:
To calculate the monthly withdrawal amount Tabitha can make from her retirement savings, we'll use the payout annuity formula. This formula takes into account the principal amount, the interest rate, and the number of payment periods to determine the annuity payment for each period. The formula for the payout annuity is:
P = (Pv * r) / [1 - (1 + r)^(-n)],
where P is the periodic payment amount, Pv is the present value of the annuity, r is the periodic interest rate, and n is the total number of payments.
Tabitha has saved $400,000 for her retirement. The annual interest rate is 6%, which we convert to a monthly rate by dividing by 12. Therefore, the monthly interest rate is 0.06 / 12 = 0.005. Since Tabitha wants to withdraw amounts for 20 years, the total number of monthly payments, n, is 20*12 which is 240 payments.
Substituting these values into the formula, we get:
P = (400,000 * 0.005) / [1 - (1 + 0.005)^(-240)]
Calculating this, we get Tabitha's monthly annuity payment:
P = (2,000) / [1 - (1.005)^(-240)]
P = 2,000 / [1 - 0.302]
P = 2,000 / 0.698
P = $2,868.20. Thus, the correct answer is closest to Option A) $2,680.92.
It's important for individuals to start saving money early to benefit from compound interest and secure their financial future for retirement.