Part One (8 Marks)

You have just turned 28 years of age. You have accepted a new promising position in one of the big banks

commencing as from your 28th birthday and you now want to decide how much money to put aside into

a retirement fund.

The retirement fund works as follows:

Every dollar invested in the fund earns 8.50% p.a. You cannot make withdrawals from your fund until

you reach your retirement age of 65. After that you can withdraw the funds to meet your day to day

living expenses. Your life expectancy is 95 and you will work until you turn 65. You want to live

comfortably during retirement, so you estimate that you will need $120,000 per year, starting at the end

of the first year of retirement, and ending on your 95th birthday.

You will contribute the same amount into your retirement fund at the end of every year during your

working life to age 65.

Hint: Draw a timeline for both questions. Your answer to 1) will be needed for 2).

1. How much do you need in your fund at age 65 if you want to withdraw $120,000 per year during

your retirement years?

Show formulas, variables, calculations and concluding statements for your calculations.

(1 x 4 = 4 marks)

2. How much do you need to contribute each year (while you are working) to fund your

retirement?

Show formulas, variables, calculations and concluding statements for your calculations.