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Old 05-18-2011, 10:02 AM
indemand_A indemand_A is offline
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Join Date: May 2011
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Default A little bit of years and interest rate.

Hey!

I have an issue relating relating to a paper work assignment. Just need some clarifying to indicate I am on the correct path.

Question asking me:

Given the FV calculated in question 2, how much can you withdraw each month from the annuity if you expect to live for another 25 years and you would like to leave $10,000 for each of your two children? You predictions are that future interest rate will be the arithmetic mean of the last 25 year’s interest rates.

Question 2, I already calculated which turns out to be:

$119, 998.40 and I calculated the arthmetic mean to be 4% = 0.04%

However I don't quite understand what it means by "You predictions are that future interest rate will be the arithmetic mean of the last 25 year’s interest rates".

Can ya help me with this explanation? I really appreciate this because it's doing my head in..

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Old 05-18-2011, 10:36 AM
ArcSine ArcSine is offline
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Default Re: A little bit of years and interest rate.

You're having to calculate the amount you can withdraw each month from the bucket for 25 years, such that exactly 20,000 will remain in the bucket immediately after your final withdrawal.

That calculation requires you to make an assumption as to what earnings rate (growth rate) the assets in the bucket will have month to month during those 25 years.

So the sentence in question is telling you to use the simple average of the past 25 years' rates as your growth rate assumption for the future-withdrawals calculation.
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