Question
7.Your friend is celebrating her 25thbirthday today and wants to start saving for her anticipated retirement at age 65. She wants to be able to
7.Your friend is celebrating her 25thbirthday today and wants to start saving for her anticipated retirement at age 65. She wants to be able to withdraw $200,000 from her saving account on each birthday for 15 years following her retirement; the first withdrawal will be on her 66thbirthday.Your friend intends to invest her money in a retirement account, which earns 8 percent return per year.She wants to make an equal annual deposit on each birthday into the account for her retirement fund.Assume that the annual return on the retirement account is8 percent before and afer her retirement.Ignore taxes and transaction costs for the problem.
a)If she starts making these deposits on her 26thbirthday and continue to make deposits until she is 65 (the last deposit will be on her 65thbirthday and the total number of annual deposits is 40), what amount must she deposit annually to be able to make the desired withdrawals at retirement? (Hint: One way to solve for this problem is to first find the value on your friend's 65thbirthday of the $200,000 withdrawal per year for 15 years after her retirement and then find the equal annual deposit that she needs to make from her 26thbirthday to 65thbirthday.)
b)Suppose that whenever your friend makes the annual deposit to the retirement account, her employer will contribute $2,000 to the same account every year as part of the company's profit sharing plan. In addition, your friend will receive a $30,000 distribution from a family trust fund on her 25thbirthday, which she will also put into the retirement account.What amount must she deposit annually now to be able to make the desired withdrawals at retirement?
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