Title: Mr. Alfred Road
|Date:||April 4, 2013|
|Length:||3 / 799|
|No of views:||0|
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We find the 20-year annuity with present value equal to the value in the account:
Present Value = annual payment ? 20-year annuity factor at 9% interest rate:
PV = annual payment
$180,000 = annual payment ? 9.129 ? Annual payment = $180,000/9.129 = $19,717
Notice that the investment account provides annual income of $19,717, which is more than the annual interest from the account...
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This is because Mr. Road plans to run the account down to zero by the end of his life.
So Mr. Road can spend: $19,717 + $600 + $9,000 = $29,317 per year
This is comfortably above his current living expenses, which are $2,000 per month or $24,000 annually.
The problem of course is inflation. We have mixed up real and nominal flows...
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