This document contains 4 problems related to retirement funding and annuities:
1) A problem calculating the size of a retirement fund needed in 20 years to provide $20,000 annually for 30 years based on expected returns.
2) A problem calculating how much needs to be invested today to reach the target retirement fund amount from problem 1.
3) A problem calculating the impact of higher expected returns on the results of problems 1 and 2.
4) Two retirement planning problems comparing ordinary versus due date annuities under different interest rate scenarios.
This document contains 4 problems related to retirement funding and annuities:
1) A problem calculating the size of a retirement fund needed in 20 years to provide $20,000 annually for 30 years based on expected returns.
2) A problem calculating how much needs to be invested today to reach the target retirement fund amount from problem 1.
3) A problem calculating the impact of higher expected returns on the results of problems 1 and 2.
4) Two retirement planning problems comparing ordinary versus due date annuities under different interest rate scenarios.
This document contains 4 problems related to retirement funding and annuities:
1) A problem calculating the size of a retirement fund needed in 20 years to provide $20,000 annually for 30 years based on expected returns.
2) A problem calculating how much needs to be invested today to reach the target retirement fund amount from problem 1.
3) A problem calculating the impact of higher expected returns on the results of problems 1 and 2.
4) Two retirement planning problems comparing ordinary versus due date annuities under different interest rate scenarios.
This document contains 4 problems related to retirement funding and annuities:
1) A problem calculating the size of a retirement fund needed in 20 years to provide $20,000 annually for 30 years based on expected returns.
2) A problem calculating how much needs to be invested today to reach the target retirement fund amount from problem 1.
3) A problem calculating the impact of higher expected returns on the results of problems 1 and 2.
4) Two retirement planning problems comparing ordinary versus due date annuities under different interest rate scenarios.
Download as DOCX, PDF, TXT or read online from Scribd
Download as docx, pdf, or txt
You are on page 1/ 2
4–23 Funding your retirement You plan to retire in exactly 20 years.
Your goal is to L G3 LG2 create a
fund that will allow you to receive $20,000 at the end of each year for the 30 years between retirement and death (a psychic told you would die after 30 years). You know that you will be able to earn 11% per year during the 30- year retirement period. a. How large a fund will you need when you retire in 20 years to provide the 30-year, $20,000 retirement annuity? b. How much will you need today as a single amount to provide the fund calcu- lated in part a if you earn only 9% per year during the 20 years preceding retirement? c. What effect would an increase in the rate you can earn both during and prior to retirement have on the values found in parts a and b? Explain.
4-23 a. LG 3: Funding Your Retirement PVA = PMT x (PVIFA11%,30) PVA = $20,000 x (8.694) PVA = $173,880.00 Calculator solution: $173,875.85 b. PV = FV x (PVIF9%,20) PV = $173,880 x (.178) PV = $30,950.64 Calculator solution: $31,024.82 c. Both values would be lower. In other words, a smaller sum would be needed in 20 years for the annuity and a smaller amount would have to be put away today to accumulate the needed future sum
4–21 Future value of a retirement annuity Hal Thomas, a 25-year-old college LG3 graduate, wishes to retire at age 65. To supplement other sources of retirement income, he can deposit $2,000 each year into a tax-deferred individual retire- ment arrangement (IRA). The IRA will be invested to earn an annual return of 10%, which is assumed to be attainable over the next 40 years. a. If Hal makes annual end-of- year $2,000 deposits into the IRA, how much will he have accumulated by the end of his 65th year? b. If Hal decides to wait until age 35 to begin making annual end-of-year $2,000 deposits into the IRA, how much will he have accumulated by the end of his 65th year? c. Using your findings in parts a and b, discuss the impact of delaying making deposits into the IRA for 10 years (age 25 to age 35) on the amount accumu- lated by the end of Hal’s 65th year. d. Rework parts a, b, and c, assuming that Hal makes all deposits at the beginning, rather than the end, of each year. Discuss the effect of beginning- of-year deposits on the future value accumulated by the end of Hal’s 65th year.
4–20 Ordinary annuity versus annuity due Marian Kirk wishes to select the better of LG3 two 10-year annuities, C and D. Annuity C is an ordinary annuity of $2,500 per year for 10 years. Annuity D is an annuity due of $2,200 per year for 10 years. a. Find the future value of both annuities at the end of year 10, assuming that Marian can earn (1) 10% annual interest and (2) 20% annual interest. b. Use your findings in part a to indicate which annuity has the greater future value at the end of year 10 for both the (1) 10% and (2) 20% interest rates. c. Find the present value of both annuities, assuming that Marian can earn (1) 10% annual interest and (2) 20% annual interest. d. Use your findings in part c to indicate which annuity has the greater present value for both (1) 10% and (2) 20% interest rates. e. Briefly compare, contrast, and explain any differences between your findings using the 10% and 20% interest rates in parts b and d.
