Question

On the day you retire you have $1,000,000 saved. You expect to live another 25 years during which time you expect to earn 6.19% on your savings while inflation averages 2.5% annually. Assume you want to spend the same amount each year in real terms and die on the day you spend your last dime. What real amount will you be able to spend each year? $61,334.36

Answer 1

OUR ANSWER IS $61,334.36

Explanation:

The real rate of return = 6.19% - 2.5% = 3.69%

We assume the annual withdrawal is P and the same will be withdrawn at the end of each year, so that the present value of the regular annuity will be $1,000,000

Total tenure = 25 Years

PV = 1 × [(1-(1 + r)⁻ⁿ] /r = P × [1 +(1.0369)⁻²⁵] /0.0369 =P× 16.147

But as per the condition, PV = $1,000,000

So P =$1000,000 /16.147 =$61,334.36