Question

Bobby Brown has just turned 48 years of age and has come to you seeking retirement advice. During your discussion the following information was communicated:

• Bobby wants to retire on his 65th birthday;

• he currently has $198,000 in his superannuation fund;

• he contributes $800 per fortnight into his super account; and

• the investment returns are 8% p.a.

In addition to the super fund, Bobby has also invested $100,000 today (his 48th birthday). The investment is in a direct share portfolio which produces average returns of 6% p.a. after tax. The investment returns are paid every 6 months. When Bobby retires at the age of 65, he will use his super and non-super investments to purchase an ordinary annuity which will provide him with a regular monthly income stream until he reaches life expectancy at 83 years of age. The rate of return for the annuity will be 4% p.a. Bobby is concerned that he may live beyond life expectancy and wishes to ensure he has a residual value of $150,000 remaining in his annuity when he turns 83. He will use the money to supplement the aged pension.

Question: • What will be the annual pension amount that Bobby will receive until age 83? Returns are compounded annually at year end. Present all calculations to support your answer.

Answer 1

		Fortnightly interest rate =r
		(1+r)^24=(1+0.08)
		1+r=(1.08^(1/24))=	1.003211857
	Rate	Fortnightly interest rate =r=	0.003211857
	Nper	Number of Fortnights to retirement=(65-48)*24	408
	Pv	Current amount in Superannuation fund	$198,000
	Pmt	Fortnightly Contribution	$800
	FV	Accumulated amount at retirement	$1,405,116
		(Using FV function of excel)
		Effective Annual Rate of Interest on investment
		Six monthly interest rate =6/2=	3%	0.03
	Rate	Effective Annual Rate of Interest on investment=	0.0609	(1.03^2)-1
	Nper	Number of Years to retirement=(65-48)	17
	Pv	Current invested amount in share portfolio	$100,000
	FV1	Accumulated amount at retirement	$273,191
		(Using FV function of excel)
	FV+FV1	Total amount available at retirement	$1,678,307
	Rate	Annual Return	4.00%
	Nper	Number of Years of annuity payment=(83-65)	18
	Pv	Amount invested for purchase of annuity	$1,678,307
	Fv	Residual value at termination of annuity	$150,000
	PMT	Annual Pension Amount	$126,726
		(Using PMT function of excel)