Question

Gillian started a retirement account with $10,000 when she turned 35. The account compounds interest quarterly at a rate of 3.625%. She made no further deposits into the account. After 20 years, she decided to withdraw 40% of what had accumulated in the account so that she could make her home handicap accessible. She had to pay a 10% penalty on the early withdrawal. What was her penalty?

Answer 1

$853.60

Explanation:

The formula for compound interest is:

A = P (1 + r/n) ^ (nt)

where:

• A = the final amount
• P = the principal amount
• r = the annual interest rate
• n = the number of times the interest is compounded per year
• t = the number of years

In this question, we are given that:

P = 10,000 r = 0.03625 n = 4 t = 20

We can plug these values into the formula and calculate A:

A = 10,000 (1 + 0.03625/4) ^ (4 x 20) A = 10,000 (1.0090625) ^ 80 A = 10,000 x 2.134 A = 21,340

This means that after 20 years, Gillian’s retirement account had $21,340 in it. She decided to withdraw 40% of this amount, which is:

0.4 x 21,340 = 8,536

She had to pay a 10% penalty on this withdrawal, which is:

0.1 x 8,536 = 853.6

Therefore, her penalty was $853.60.