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Your 75-year-old grandmother expects to live for another 15 years. She currently has $1,000,000 of savings, which is invested to earn a guaranteed 5% rate of return. If inflation averages 2% per year, how much can she withdraw (to the nearest dollar) at the beginning of each year and keep the withdrawals constant in real terms, i.e., growing at the same rate as inflation and thus enabling her to maintain a constant standard of living?

Respuesta :

Based on your grandmother's savings, her rate of return, and inflation, the amount she can withdraw at the beginning of each year is $81,027.

What is annuity?

An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees.

The grandmother can withdraw at the beginning of each year

First, find the inflation adjusted return,

1 + Adjusted return = (1 + nominal return) / (1 + inflation rate)

1 + Adjusted return = 1.05 / 1.023

Adjusted return = 2.94%

Using the PMT function on the spreadsheet, the amount to be withdrawn can be found:

Rate = 2.9%

Nper = 15 years

PV = - 1,000,000

Type = 1 (Withdrawal at year beginning)

Amount will be found as $81,027.

Learn more about annuity here,

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