You are 45 years of age and your asporation is to retire in 17 years at age 62.
Assume you are about to set up a new retirement savings account at a 4% annual interest rate (APR). Based on how you want to live in retirement, and any other sources of retirement income you have available, how much money do you think you will need to draw from your savings account to enjoy $40,000 each year?
What contribution plan can you follow in order to finance your new retirement account to reach this savings goal?
600,000
Kimberly Ricci
To calculate how much money you will need to draw from your savings account to enjoy $40,000 each year in retirement, we need to consider the time span and the interest rate. Since you plan to retire in 17 years, we need to determine the amount required to generate $40,000 annually for a period of 25 years (based on the assumption that you will live until age 87, which is 25 years after retirement).
First, let's calculate the future value (FV) of $40,000 per year for 25 years at a 4% annual interest rate. We can use the future value of an ordinary annuity formula:
FV = P * [(1 + r)^n - 1] / r
Where:
FV = Future Value
P = Annual Payment
r = Annual interest rate
n = Number of years
Plugging in the values, we have:
FV = $40,000 * [(1 + 0.04)^25 - 1] / 0.04
Calculating this, we get:
FV ≈ $1,398,491.21
So, to enjoy $40,000 per year for 25 years after retiring at age 62, you will need approximately $1,398,491.21 in your retirement savings account.
Now, let's determine the contribution plan you can follow to finance your new retirement account and reach this savings goal. Assuming you have zero initial savings, you will have to accumulate this amount over the course of the 17 years before retirement.
To calculate the required annual contribution, we can use the formula for the present value of an annuity:
PV = P * [1 - (1 + r)^-n] / r
Where:
PV = Present Value (the amount you need to accumulate)
P = Annual Payment (contribution)
r = Annual interest rate
n = Number of years
Plugging in the values, we have:
$1,398,491.21 = P * [1 - (1 + 0.04)^-17] / 0.04
Solving this equation for P, we find:
P ≈ $51,321.13
This means you will need to contribute approximately $51,321.13 per year for 17 years to finance your new retirement account and reach the desired savings goal of $1,398,491.21.
It's important to note that this calculation assumes a constant 4% annual interest rate and does not account for inflation or any other sources of retirement income you may have. Additionally, consulting with a financial advisor can provide you with personalized advice tailored to your specific financial situation.