Assume that an employee joins the firm at age 25, works for 40 years to age 65, and then retires. The employee lives another 15 years, to age 80, and during retirement draws a pension of $20,000 at the end of each year. How much must the firm contribute annually (at year-end) over the employee's working life to fully fund the plan by retirement age if the plan's actuarial rate of return is 10 percent? Draw a graph which shows the value of the employee's pension fund over time. Why is real-world pension fund management much more complex than indicated in this illustration?

MINI CASE 

Southeast Tile Distributors Inc. is a building tile wholesaler that originated in Atlanta but is now considering expansion throughout the region to take advantage of continued strong population growth. The company has been a "mom and pop" operation supplemented by part-time workers, so it currently has no corporate retirement plan. However, the firm's owner, Andy Johnson, believes that it will be necessary to start a corporate pension plan to attract the quality employees needed to make the expansion succeed. Andy has asked you, a recent business school graduate who has just joined the firm, to learn all that you can about pension funds, and then prepare a briefing paper on the subject. To help you get started, he sketched out the following questions: