Your 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 annual 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?

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 constant real withdrawal amount is calculated to be approximately $81,027.

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