Excel is a great tool for solving problems, but with many time value of money problems, you may still need to draw a time line. For example, consider 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 …………….$90,000
Years to withdraw in retirement …………………20
Interest rate ………………………………………8%
Because your friend is planning ahead, the first withdrawal will not take place until one year after she retires. She wants to make equal annual deposits into her account for her retirement fund.
a. If she starts making these deposits in one year and makes her last deposit on the day she retires, what amount must she deposit annually to be able to make the desired withdrawals in retirement?
b. Suppose your friend has just inherited a large sum of money. Rather than making equal annual payments, she has decided to make one lump sum deposit today to cover her retirement needs. What amount does she have to deposit today?
c. Suppose your friend’s employer will contribute to the account each year as part of the company’s profit sharing plan. In addition, your friend expects a from a family trust several years from now. What amount must she deposit annually now to be able to make the desired withdrawals in retirement? The details are:
Employer’s annual contribution ……………………….$ 1,500
Years until trust fund …………………………..20
Amount of trust fund …………………….$25,000
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