Imagine you just earned your degree. According to The Economist MBA Finder, the average starting salary for your graduate degree is about $120,000 per year. Suppose you just got hired at this salary and decide to start planning for your retirement. You plan to work 25 years before retirement and to live 30 years after retirement. Prior to retirement, you will earn 15% with monthly compounding by investing in stock index funds. During retirement, you plan to invest mostly in dividend-paying stocks earning 5% return with quarterly compounding.

a) If you invest 10% of your monthly salary at the end of each month, how much money will you accumulate by the retirement date? Assume that your annual salary of $120,000 is paid in equal monthly payments and, for simplicity, assume no growth in salary over the next 25 years.

b) After retirement, you will make equal annual withdrawals from your investment fund at the beginning of each year. In addition, you would like to have $200,000 at the end of your life (30 years after retirement) just in case if you happen to live longer or decide to leave some inheritance for your grandchildren. Given this scenario, how much will you be able to withdraw at the beginning of each year during your retirement?

Answer rating: 100% (QA)

a To calculate the accumulated value of investment by the retirement date we can use the formula for ... View the full answer