How much must you deposit each year into your retirement account starting now and continuing through year 9, if you want to be able to withdraw $80,000 per year forever, beginning 30 years from now? Assume the account earns interest at (a) the generous rate of 10% per year, and (b) a more conservative rate of 4% per year. Compare the two amounts.
What will be an ideal response?
Find P in year 29 using (P/F,i%,20) to move back to year 9, and then use (A/F,i%,10) factor to find A
(a) A = [80,000/0.10](P/F,10%,20)(A/F,10%,10)
= [80,000/0.10](0.1486)(0.06275)
= $7459.72 per year
(b) A = [80,000/0.04](P/F,4%,20)(A/F,4%,10)
= [80,000/0.04](0.4564)(0.08329)
= $76,027.11 per year
It takes approximately 10 times more per year at 4% than at 10% per year.
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