Question

Mr. Ambitious is celebrating his 30th birthday today. He plans to retire shortly after his 50th birthday and estimates that he can live comfortably off a pension of $50,000 per year, paid annually for 40 years starting with his 51st birthday. He reckons that in order to achieve this, he only needs to invest $50,000 into his retirement fund every two years until he retires. The first investment will be made on his 32nd birthday and the last on his 50th birthday. The retirement fund offers a 10% annual rate on all investments and will continue to do so in future. What is the maximum annual pension he can get from his scheme? Can Mr. Ambitious achieve his financial goal? Explain.

( I don't want an excel answer)

Answer 1

Calculating Value of Retirement Benefit 50th Birthday,

Using TVM Calculation,

PV = [FV = 0, PMT = 50,000, N = 40, I = 0.10]

PV = $488,952.54

Bi-Annual Rate = (1.10)2 - 1 = 21.00%

Calculating Value of Deposit at retirement,

Using TVM Calculation,

FV = [PV = 0, PMT = 50,000, N = 10, I = 0.21]

FV = $1,363,690.46

As value of deposit is greater than present value of retirement benefit at retirement, so goal can be achieved

Calculating Maximum Pension,

Using TVM Calculation,

PMT = [PV = 1,363,690.46, FV = 0, N = 40, I = 0.10/]

PMT = $139,450.19