Question
1. NY Life offers Alex an annuity that pays $50,000 per year until death in equal monthly installments. The cost of the annuity at retirement
1. NY Life offers Alex an annuity that pays $50,000 per year until death in equal monthly installments. The cost of the annuity at retirement is $950,000. From an NPV perspective, is this annuity better or worse than the 401(k) and/or DB/K plans? Assume Alex lives 15 years after retirement and inflation of 3%.
2. Chubb also offers a DB/K plan that promises 60% of average employee salary upon retirement, payable until death.4 The plan requires employees contribute 5% each paycheck. Alexs average salary during his 32-year tenure is $120,000. If he lives 15 years after retirement and receives monthly payments, what is the present value of the DB/K plan distributions assuming 3% inflation? Would Alex have been better off choosing the DB/K plan over his 401(k) contributions?
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