Question

Annuity Due Converting an annuity to an annuity due decreases the present value. Generally speaking, this statement is True or False? Explain it. [“Converting an annuity to an annuity due” means if you always make payment at the end of each year, now you change to make the payment at the beginning of each year.]

You believe you will need to have saved $1,000,000 by the time you retire in 40 years in order to live comfortably.  In order to meet your retirement goal, how much must you save each yearbefore you retire (i.e., over the next 40 years)? Assume the interest rate will averagely 6% per year over the period.

Answer 1

Ordinary annuity payment is made at the end of the year.

Annuity due payment is made at the beginning of the year.

Present value of payment will be more in case of annuity due, when compared with ordinary annuity.

If you convert annuity into annuity due, its present value will be increased.

Therefore, the above statement is False.

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In case of annuity:

Payment is $6,461.54.

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In case of annuity due:

Payment is $6,095.79.