Question

Dear Financial Adviser,

My spouse and 1 are each 62 and hope to retire in three years. After retirement we will receive $9,100 per month after taxes from our employers' pension plans and $3,100 per month after taxes from Social Security. Unfortunately our monthly living expenses are $16,600. Our social obligations preclude further economies.
We have $820,000 invested in a high-grade, tax-free municipal-bond mutual fund. The return on the fund is 5.0% per year. We plan to make annual withdrawals from the mutual fund to cover the difference between our pension and Social Security income and our living expenses.
Sincerely.
Luxury Challenged
Marblehead, MA
You can assume that the withdrawals (one per year) will sit in a checking account (no interest) until spent. The couple will use the account to cover the monthly shortfalls.

How many years before Luxury Challenged runs out of money?

Answer 1

To calculate how many years before Luxury Challenged runs out of money, subtract the income from living expenses and divide the total investment by the annual shortfall.

Step-by-step explanation:

To find out how many years before Luxury Challenged runs out of money, we need to calculate the annual shortfall and divide it by the annual withdrawal from the municipal-bond mutual fund.

The annual shortfall is calculated by subtracting the monthly pension and Social Security income from the monthly living expenses and multiplying the result by 12. In this case, the annual shortfall is ($16,600 - $9,100 - $3,100) x 12 = $54,000.

Then, we divide the total amount invested in the mutual fund by the annual shortfall. In this case, $820,000 / $54,000 = 15.19 years.

Therefore, Luxury Challenged will run out of money in approximately 15 years.