You deposit $1.2 million into your account to cover expenses in the next 12 years. The account earns interest at the rate of 4%, compounded annually. Assume you expect the balance of the account to be $0 at the end of the 12th year. a) What annual level of living expenses will your initial deposit support? (e.g., what equal annual withdrawal can you make for the next 12 years)? b) Suppose you realize your living expenses will increase at an annual rate of 2% due to inflation. Determine the updated annual spending plan in line with this model: how much can you withdrawal at the end of the first year, knowing that your withdrawal will increase by 2% each year? c) Suppose the initial deposit is still planned to support your equal annual expenses in the next 10 years as in part a), but don't need to withdraw any money from your account for the first 6 years. You will withdraw from your account annually starting from the end of year 7 till the end of year 12. What annual level of living expenses will your initial deposit support?
You deposit $1.2 million into your account to cover expenses in the next 12 years. The account earns interest at the rate of 4%, compounded annually. Assume you expect the balance of the account to be $0 at the end of the 12th year. a) What annual level of living expenses will your initial deposit support? (e.g., what equal annual withdrawal can you make for the next 12 years)? b) Suppose you realize your living expenses will increase at an annual rate of 2% due to inflation. Determine the updated annual spending plan in line with this model: how much can you withdrawal at the end of the first year, knowing that your withdrawal will increase by 2% each year? c) Suppose the initial deposit is still planned to support your equal annual expenses in the next 10 years as in part a), but don't need to withdraw any money from your account for the first 6 years. You will withdraw from your account annually starting from the end of year 7 till the end of year 12. What annual level of living expenses will your initial deposit support?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:You deposit $1.2 million into your account to cover expenses in the next 12 years.
The account earns interest at the rate of 4%, compounded annually. Assume you expect the balance
of the account to be $0 at the end of the 12th year.
a) What annual level of living expenses will your initial deposit support? (e.g., what equal annual
withdrawal can you make for the next 12 years)?
b) Suppose you realize your living expenses will increase at an annual rate of 2% due to inflation.
Determine the updated annual spending plan in line with this model: how much can you
withdrawal at the end of the first year, knowing that your withdrawal will increase by 2% each
year?
c) Suppose the initial deposit is still planned to support your equal annual expenses in the next
10 years as in part a), but don't need to withdraw any money from your account for the first
6 years. You will withdraw from your account annually starting from the end of year 7 till the
end of year 12. What annual level of living expenses will your initial deposit support?
d) Based on part c), suppose now that your living expenses will increase at an annual rate of 2%
due to inflation. Determine how much you can withdraw at the end of year 7 given that your
withdrawals will increase in line with inflation from the end of year 7 till the end of year 12.
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