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?
A)$65,632
B)$72,925
C)$81,027
D)$89,130
E)$98,043

Question

Quizplus · Accepted Answer

The real rate of return is approximately 3% (5% nominal return - 2% inflation). Using the formula for the present value of an annuity, the grandmother can withdraw $81,027 at the beginning of each year to maintain a constant standard of living over 15 years.

75-Year-Old Grandmother Expects to Live for Another 15 Years