Question

Suppose that on your 21st birthday you are given a $1,000,000 trust fund. What interest rate must you earn to ensure that if you withdraw $50,000 per year there is money in the account forever

Answer 1

The correct answer is 5%.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Annual withdrawal = $1,000,000

Annual withdrawal = $50,000

So, we can calculate the interest rate by using following formula:

Interest rate = Annual withdrawal ÷ Annual withdrawal

by putting the value in the formula, we get

Interest Rate = $50,000 ÷ $1,000,000

= 0.05

Or 5%

Hence, the Interest rate should be 5%.