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Craig Osborn defined-benefit retirement plan: Payments short

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A small business owner (Craig Osborn) has a defined-benefit retirement plan for him and three employees. At retirement, Craig will get 50% of his last-year before retirement's annual salary while each employee will get 40% of his or her last-year before retirement's annual salary. The company will fund the plan by making 15 annual contributions. The plan's compound annual interest rate is 12%. The plan will make annual payment to each participant at the beginning of each year for 20 years starting from retirement date.

She provides you the following salary and retirement information current as of January 1, 2015 (This is the date the 15 annual contributions to the plan starts).

Name Current Annual Salary Estimated Retirement Date
Craig Osborn $48,000 January 1, 2040
Dean Smith $36,000 January 1, 2045
Danny Aubrey $18,000 January 1, 2035
Pamela Langford $15,000 January 1, 2030
Each year-end, Craig and his employees will have raises of 4%.
Required
a. What is the annual retirement benefit for each plan participant? (Round to the nearest dollar.) Hint: Craig will receive raises for 24 years, Dean will receive raises for 29 years, Danny will receive raises for 19 years, and Pamela will receive raises for 14 years.
b. What amount must be contributed to the plan at the end of 15 years to ensure that all benefits will be paid? (Round to the nearest dollar.) Hint: calculate the PV of annuity for each participant then total. Note that Craig will retire 10 years after contributions stop, Dean will retire 15 years after contributions stop, Danny will retire 5 years after contributions stop, and Pamela will retire the beginning of the year after contributions stop.
c. What is the required annual beginning of the year contributions? Recall that annual compounded interest rate is 12%.

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Solution Summary

This analysis is a multi-step process. The steps are shown and are for an intermediate level student (not novice). click in cells to see use of formulas in excel.

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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