Retirement Saving - TVM Calculation Examples

Q. You plan to retire 33 years from now. You expect that you will live 27 years after retiring. You want to have enough money upon reaching retirement age to withdraw $180,000 from the account at the beginning of each year you expect to live, and yet still have $2,500,000 left in the account at the time of your expected death (60 years from now). You plan to accumulate the retirement fund by making equal annual deposits at the end of each year for the next 33 years. You expect that you will be able to earn 12% per year on your deposits. However, you only expect to earn 6% per year on your investment after you retire since you will choose to place the money in less risky investments. What equal annual deposits must you make each year to reach your retirement goal?

I. Calculate PV of amount needed at the time of retirement

Open the Present Value of Annuity screen. Select solve for Present Value.

Annual Interest Rate: 6

Payment Amount: 180000
Payment Frequency: Yearly
Number of payments: 27
Compounding Interval: Yearly
End Balance: 2500000

Payment Mode: Beginning

Ans: PV = 3038989.79

II. Calculate Payment to achieve your retirement goal

Open the Future Value of Annuity screen. Select solve for Payment.

Future Value = 3038989.79
Annual Interest Rate: 12

Payment Frequency: Yearly
Number of payments: 33
Compounding Interval: Yearly

Payment Mode: End

Ans: 8874.79