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It's your friends 35th birthday today and you happen to talk to her about her retirement plans. Your friend tells you she is planning to save $5,000 per year for retirement, and has just made her first deposit today. She will invest in a mutual fund that will provide a return of 8% per year. She plans to retire when she turns 65 (and will make 30 annual payments of $5,000 until then), and she expects to live to age 90. Under these assumptions, how much can she spend in each year after she retires? Her first withdrawal will be made one year after she retires (i.e. on her 66th birthday), the last withdrawal on her 90th birthday.

Sagot :

She can spend $6,480 each year after she retires.

What is a retirement plan?

  • A retirement plan is a financial arrangement created to supplement income received from the job after retirement.
  • Employers, insurance providers, labor unions, the government, or other organizations may establish these programs.
  • By providing advantageous tax treatment to a wide range of plans, Congress has stated a goal to promote sensible retirement planning.
  • The Internal Revenue Code's provisions form the basis for the federal tax features of retirement plans in the United States, while the Employee Retirement Income Security Act's requirements are used by the Department of Labor to govern these plans (ERISA).

Solution -

[tex]5000 * 30 = 150,000[/tex]

8% of [tex]150,000 = 12,000[/tex]

The total amount for retirement [tex]= 162,000[/tex]

Number of years to spend money [tex]= 25[/tex]

The money she can spend each year = [tex]\frac{162,000}{25} =6,480[/tex]

Therefore, she can spend $6,480 each year after she retires.

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