For questions use the age 26 and 3 months to complete A & B.

Assume you drink one coffee per day, 5 days a week. Assume coffee price is $4.00. That makes it $20 per week and $80 per month. Assume you can invest $80 per month in the stock market and assume you can earn 1 % per month on your stock investment or 12 % per year.

A: At your retirement, when you are 65 years old, how much you will have in your retirement account if you switch from coffee drinking to investing in the stock market?

B. Assume that when you get to 65 (retirement age) you switch your funds from stock market investment to bond market investment. Assume you can earn 7% on your bond investment. You decide to withdraw a constant amount each year for the next 20 years when you get to retirement age of 65. How much will be your annual withdrawal from age 66 to 85 (Nothing left at 85) if you switch your coffee drinking to stock and bond investments.

------------------------------------------------------------------------------------------------------------------------------------------------------

Hypothetical example:: Assume I am 54 and I retire at age 68, how much will be the total amount of money in my account if I switch from coffee drinking to investing in the stock market? B) How much a can withdraw per year after I get 68 years old, for 20 years?

ANSWER:

Assume I am 54 years old and will retire at age 68:

Retire in 14 years at age 68.

Excel

1.a

Inputs

Interest

1.00%

Period

168

(14*12)

Payment

80

FV

($34,567.76)

FV(B7,B8,B9,0,0); B7,B8,B9=1%,168,80

1.b

inputs

Interest

7.00%

Period

20

PV

($34,567.76)

PMT

$3,262.95

PMT(B16,B17,B18,0,0) B16,B17,B18=7%,20,(34567)