Jamal plans to retire in 17 years. He is saving $2000 every month in a retirement savings account paying him a long-term interest of 9% compounded monthly until retirement. The rate changes following the retirement. He wants $7000 per month paid to him for 20 years after the retirement. At what rate should his savings account pay him to fulfill his dream? (Use the Rate function in Excel)
A) 9%
B) 10%
C) 0.86%
D) 10.27%
E) 0%

Question

Quizplus · Accepted Answer

To solve the problem, we can use the following steps:

1. Calculate the future value of the savings account after 17 years of saving $2000 per month at an interest rate of 9% compounded monthly:

=FV(0.09/12, 17*12, -2000)

The result is $901,518.77.

2. Calculate the monthly annuity required to receive $7000 per month for 20 years:

=PMT(RATE(20*12, -7000, 0, $901,518.77), 20*12, -901,518.77)

The result is $3,850.68.

3. Use the RATE function to calculate the interest rate required to achieve the monthly annuity of $3,850.68 for 20 years:

=RATE(20*12, -3850.68, 0, $901,518.77)

The result is 10.27%.

Therefore, the answer is D) 10.27%.

Jamal Plans to Retire in 17 Years