Question Description

This is a classic retirement problem.

A friend is celebrating her birthday and wants to start saving for her anticipated retirement. She has the following years to retirement and retirement spending goals:

Years until retirement 30

Amount to withdraw each year $40,000

Years to withdraw in retirement 20

Interest rate 5%

Because your friend is planning ahead, the first withdrawal will not take place until one year after she retires. She wants to make equal annual deposits into her account for her retirement fund.

If she starts making these deposits in one year and makes her last deposit in the day she retires, what amount must she deposit annually to be able to make the desired withdrawals at retirement?

After finding the solution discuss the way it can be solved using excel. What is the implication when problem says “withdrawal will not take place until one year after she retires”?

References :

Applied Corporate Finance, 4th ed.

Damodaran, Aswath

Wiley. 2015

ISBN-13: 978-1118808931

Principles of Corporate Finance, 10th ed.

Brealey, R. A., Myers, S. C., & Allen, F.

McGraw Hill Irwin. (2011).

ISBN: 978-0073530734

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