Assume you are 25 and started a job. You will work until 60 and live until 90. You can earn 6% EAR per year on your investments during your lifetime. Assume that you have saved up $1,000,000 by the time you retire (age 60).

Calculate how much you will have to live on each month during retirement.

Round to a whole number, and do not use dollar signs or commas in your answers.

Question

Assume you are 25 and started a job. You will work until 60 and live until 90. You can earn 6% EAR per year on your investments during your lifetime. Assume that you have saved up $1,000,000 by the time you retire (age 60).

Calculate how much you will have to live on each month during retirement.

Round to a whole number, and do not use dollar signs or commas in your answers.

BlackTom AI · Accepted Answer

Question restatement: You are 25 now, will retire at 60 and live to 90. You earn 6% effective annual rate (EAR) on investments. You have saved 1,000,000 by age 60. You need to determine the monthly amount you can spend during retirement, every month for 30 years, rounding to a whole number without dollar signs or commas.

Step 1 – Identify retirement horizon and cash-flow structure. The withdrawal period lasts from age 60 to 90, which is 30 years or 360 months. We assume withdrawals are level each month and the invested balance continues to earn 6% annually (compounded monthly for the purpose of monthly withdrawals).

Step 2 – Convert annual rate to a monthly rate. If the effective annual rate is 6%, the equivalent monthly rate r satisfies (1 + r)^12 = 1.06. Thus r = (1.06)^(1/12) − 1. Numerically, (1.06)^(1/12) ≈ 1.004867, so r ≈ 0.004867 (about 0.4867% per month).

Step 3 – Use the standard annuity withdrawal formula. With present value PV = 1,000,000, monthly rate r ≈ 0.004867, and total payments n = 360, the level monthly withdrawal PMT is given by:
PMT = r × PV / (1 − (1 + r)^(-n)).

Step 4 – Compute the discount factor (1 + r)^(-n). We can observe that (1 + r)^12 = 1.06, so (1 + r)^(360) = (1.06)^(30) ≈ 5.742. Therefore (1 + r)^(-360) ≈ 1 / 5.742 ≈ 0.174. Consequently, the denominator 1 − (1 + r)^(-n) ≈ 1 − 0.174 ≈ 0.826.

Step 5 – Plug in the numbers. Numerator r × PV ≈ 0.004867 × 1,000,000 ≈ 4,867. Divide by the denominator 0.826: 4,867 / 0.826 ≈ 5,892 (rounded to the nearest dollar).

Step 6 – Sanity check and rounding consideration. The result is on the order of mid to high five-thousand dollars per month, which aligns with using a $1,000,000 nest egg at a 6% EAR over 30 years. If you performed the calculation with a slightly different rounding of the monthly rate or the PV, you’d still land in the vicinity of about five thousand eight hundred dollars per month.

Notes and potential caveats:
- This calculation assumes withdrawals occur at the end of each month and the fund remains invested at the stated EAR throughout retirement.
- If fees, taxes, or an alternative withdrawal timing (e.g., beginning of month) are considered, the result would differ.
- The result is presented as a whole-number monthly amount as requested, without currency symbols or separators.

COMM_V 298 101 102 103 2025W1 Class 5 Practice Quiz 2

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