Question

To prepare for retirement you are setting aside $250 per month for the next 30 years...

  1. To prepare for retirement you are setting aside $250 per month for the next 30 years and can earn 5.5 percent annual interest. Suppose in 30 years you can buy an annuity that will pay you in monthly installments for 25 years after your retirement, and you expect to earn 4 percent annual interest at that time. How much will you receive each month from this investment opportunity when you retire? Assume all payments occur at the end of each month.

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Answer #1

Information provided:

Monthly saving= $250

Time= 30 years*12 = 360 months

Interest rate= 5.5%/12 = 0.4583% per month

The question is solved by first calculating the future value of savings.

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

PMT= -250

N= 360

I/Y= 0.4583

Press CPT and FV to compute the future value.

The value obtained is 228,402.97.

Therefore, the future value of the monthly saving is $228,402.97.

Next, the amount of monthly payment to be received during retirement is calculated.

The monthly payment to be received is calculated by entering the below in a financial calculator:

PV= -228,402.97

N= 25*12 = 300

I/Y= 4/12 = 0.3333

Press CPT and PMT to compute the amount of monthly payment to be received.

The value obtained is 1,205.60.

Therefore, the amount of payment to be received each month after retirement is $1,205.60.

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