Section PF.11 – Practice Problems

Note: If your final answer is a dollar amount then it should be rounded to the nearest cent.

1. After retiring, you want to be able to withdraw $1,500.00 each month from your account for 25 years. Your account earns 6% interest compounded monthly. How much do you need in your account when you retire?

2. After retiring, you want to be able to withdraw $20,000.00 each year from your account for 15 years. Your account earns 7% interest compounded annually. How much do you need in your account when you retire?

3. How much money will you need to have at retirement so you can withdraw $60,000.00 a year for 20 years from an account earning 8% compounded annually?

4. You want to be able to withdraw $30,000.00 each year from your account for 25 years. Your account earns 8% interest compounded annually.

a. How much do you need in your account at the beginning?
b. How much total money will you pull out of the account?
c. How much of that money is interest?

5. You want to be able to withdraw $35,000.00 each year from your account for 20 years. Your account earns 6% interest compounded annually.

a. How much do you need in your account at the beginning?
b. How much total money will you pull out of the account?
c. How much of that money is interest?

6. You have $500,000.00 saved for retirement. Your account earns 6% interest compounded monthly. How much will you be able to pull out each month, if you want to be able to take withdrawals for 20 years?

7. You have $400,000.00 saved for retirement. Your account earns 7% interest compounded monthly. How much will you be able to pull out each month, if you want to be able to take withdrawals for 25 years?

8. You have $300,000.00 saved for retirement. Your account earns 9% interest compounded monthly. How much will you be able to pull out each month, if you want to be able to take withdrawals for 15 years?

9. You want to be able to withdraw $50,000.00 from your account each year for 30 years after you retire. You expect to retire in 25 years. If your account earns 9% interest compounded annually, how much will you need to deposit each year until retirement to achieve your retirement goals?

10. You want to be able to withdraw $25,000.00 from your account each year for 20 years after you retire. You expect to retire in 30 years. If your account earns 10% interest compounded annually, how much will you need to deposit each year until retirement to achieve your retirement goals?

11. Mike wants to be able to withdraw $10,000.00 from his retirement account every quarter for 10 years. He expects to retire in 15 years. If Mike’s account earns 8% interest compounded quarterly, how much will he need to deposit each quarter during the first 15 years in order to accomplish his goal?

12. After the birth of your first child, you decide to buy a life insurance policy for yourself but you can’t decide how much to buy. In the event of your untimely death, you estimate that the life insurance money can be invested in an account earning 7% interest compounded monthly. You would like your child to get a monthly payment of $1,000.00 for 18 years. How much should your life insurance policy be worth in order to achieve your goal?

13. You have saved $500,000.00 in a retirement account paying 8% interest compounded monthly and are ready to start your retirement. You have to figure out how much money you can safely take out of your account every month because you don’t want to run out of money before you die. How much money can you take out each month if you expect to live another 20 years? 30 years?

14. You would like to give a $1,000.00 scholarship to a deserving student every year. You want the scholarship to be funded by an investment account so it can continue for 30 years.

a. How much money must be deposited in an investment account, paying 8% interest compounded annually, in order to give a $1,000.00 scholarship every year for 30 years? (The money deposited is called an endowment)

b. You would like to save the money needed for the endowment by making regular monthly deposits, for 10 years, into an account earning 8% interest compounded monthly. How much do you need to deposit every month to reach your goal?

15. You would like to give a $2,000.00 scholarship to a deserving student every year. You want the scholarship to be funded by an investment account so it can continue for 30 years.

a. How much money must be deposited in an investment account, paying 8% interest compounded annually, in order to give a $2,000.00 scholarship every year for 30 years? (The money deposited is called an endowment)

b. You would like to save the money needed for the endowment by making regular monthly deposits, for 20 years, into an account earning 8% interest compounded monthly. How much do you need to deposit every month to reach your goal?