Question

Pensions Meg's pension plan is an annuity with a guaranteed return of 7% per year (compounded quarterly). She would like to retire with a pension of $10,000 per quarter for 25 years. If she works 37 years before retiring, how much money must she and her employer deposit each quarter? (Round your answer to the nearest cent.) $

Answer 1

The question is solved in two parts. First, the future value of annuity savings of 25 years is calculated.

Information provided:

Annuity= $10,000

Time= 25 years*4= 100 quarters

Interest rate= 7%/4= 1.75% per quarter

The future value is calculated by entering the below in a financial calculator:

PMT= 10,000

N= 100

I/Y= 1.75

Press the CPT key and FV to compute the future value.

The value obtained is 2,667,517.68.

Therefore, the value of the pension fund is $2,667,517.68.

Next, the amount of the quarterly deposit is calculated.

Enter the below in a financial calculator to compute the amount of quarterly deposit:

PV= -2,667,517.68

N= 37*4= 148

I/Y= 1.75

Press the CPT key and PMT to compute the amount of quarterly deposit.

The value obtained is 50,560.54.

Therefore, $50,560.54 has to be deposited by Meg and her employer each quarter.