I struggle with TVM questions, mostly the annuity due problems. I’ve tried drawing timelines, and it doesn’t seem to help. Will somebody please explain how this should be entered into the calculator?
From the Schweser book:
A client plans to retire in 15 years and will need to withdraw $50,000 from his retirement account each year for 10 years, beginning on the day he retires. After that, he will need to withdraw $20,000 per year for 25 years. The account returns 4% annually. The amount he needs to have in the account on the day he retires is closest to:
The answer is B, as the amount comes out to $641,284.
Also, if anyone can help me to understand how to work through these problems, I’d greatly appreciate it.
Thanks breadmaker. I was trying to do it by finding the PV of $50,000 for 10 years and $20,000 for 25 years. I just realized the mistake I was making was not discounting the PV of the $20,000 payments at year 10 an additional 10 years.
To your point S2000, I now understand how a timeline would’ve helped there. The beginning/end of periods is what confuses me with timelines. For example, if a payment occurs at the beginning of year 5 and I wanted to find the PV of that payment, would I put that at year 5 on the timeline or year 4? I’m thinking at year 4 since it would be discounted 4 periods instead of 5. Maybe I’m overcomplicating this.