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Category > Business & Finance Posted 25 May 2017 My Price 11.00

You wish to retire in 20 years

You wish to retire in 20 years, at which time you want to have accumulated enough money to receive an annual annuity of $12,000 for 25 years after retirement. During the period before retirement you can earn 8 percent annually, while after retirement you can earn 10 percent on your money. What annual contributions to the retirement fund will allow you to receive the $12,000 annuity?

We want have an accumulated balance of $12,000 for 25 years after retirement. During the retirement period return, can be earned of 8% and after retirement it will be 10% on the money invested.

It is required to compute the annual contributions to be made to receive the annual balance of $12,000. First, it is required to compute the present value of an annuity during retirement Present value = annuity amount × PVAF(r, n) Where, PVAF means present value annuity factor, r, means rate of return and n, means number of years. PV = A × PVAF (10%, 25 years) = $12,000 × 9.077 = $108,924

To determine the annual deposit into the account earning 8% that is necessary to accumulate $108,924 after 20 years, use the Future Value of an Annuity table: Appendix C A = Future value ÷ FVAF (r, n) A = FVA ÷ FVAF (8%, 20 years) = $108,924 ÷ 45.762 = $2,380.23

Hence, the annual contribution required to be made per year to receive $ 12,000 at the end of 20 years is $2,380.23

***I don't understand why you would use 10% interest rate to find the present value of an annuity During Retirement, and not the 8%.***

 

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Status NEW Posted 25 May 2017 06:05 PM My Price 11.00

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