Suppose a man is 25 years old and would like to retire at age 60. Furthermore, he would like to have a retirement fund from which he can draw an income of $50000 per yearlong dash forever! How can he do it? Assume a constant APR of
7%.He can have a retirement fund from which he can draw $50000 per year by having $ in his savings account when he retires.
What you are thinking about is something called "Perpetual Annuity". You can get it as follows:
$50,000 / 7% =$714,285.71. This is how much you must save in 35 years from age 25 to 60. So, the question becomes how much must you deposit each month OR each year to get the above amount at age 6o?.
This is the formula you will use to attain your goal. Will assume annual deposits.
FV =P x {[1 + R]^N - 1 / R}
$714,285.71 =P x {[1 + 0.07]^35 - 1 / 0.07}, solve for P, or annual payment.
P =$5,167.11 - This is what you must deposit each year in your fund to get $714,285.71 at 60, which will allow you to withdraw $50,000 @ 7% FOREVER !!.
P.S. Try and do the math in the above formula and let us see if you can get the same answer that I did.
