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Funding Your Retirement

Funding your retirement.

You plan to retire in exactly 20 years. Your goal is to 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 exactly 30 years after you retire). 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 calculated 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.

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Solution Preview

a. The fund amount would be the present value of payments. The annual amount is $20,000. We need to calculate the present value of annuity. Using the PV of annuity formula

PV = PMT [(1 - (1 / ...

Solution Summary

The solution explains how to determine the amount needed to provide a retirement annuity using step by step calculations.