Question

In: Finance

Description Construct a personal retirement problem and solve it. The purpose of this exercise is to...

Description

Construct a personal retirement problem and solve it. The purpose of this exercise is to use the chapter’s concepts of future values, annuities, and compounding to your personal financial planning.

Instructions

◦Determine the amount of investment funds you currently have available in all personal investments and self-directed and vested retirement accounts

◦Then, determine how much you will be adding to your investments a year in the future

◦Next, decide at what age you plan to retire. Determine what annual investment return you expect to earn on your investments

◦Calculate the future value of your investments at retirement

◦Justify your return rate by explaining what you plan to invest in and its historic returns

◦After determining your nest egg at retirement, adjust the variables at least three times as a means of increasing the retirement account. For example, change the age you will retire, change the expected return rate, and change the amount you save annually. Try to adjust the variables in order that you can develop a retirement value that you are happy with

Solutions

Expert Solution

PART 1

Present age= 35; Retirement age= 55

1. Amount of present savings= $200,000

2. Amount added after a year = $10000 every year

3. Annual return= 6%

4. FV of the investment= 200,000*(F/P,6%,20) + 10000*(F/A,6%,19)

=200,000* 3.207 + 10000*33.760

=$ 979,000

5. I plan to invest in One ETF, iShares S&P U.S. Preferred Stock that has historically given a return which is close to 6%. I will also invest a portion in the Bank of America Merrill Lynch High Yield Master II index which has also given a close to 6% yield.

PART 2:

1. Change in retirement age

Present age= 35; Retirement age= 50

1. Amount of present savings= $200,000

2. Amount added after a year = $10000

3. Annual return= 6%

4. FV of the investment= 200,000*(F/P,6%,15) + 10000*(F/A,6%,14)

=200,000* 2.397 + 10000*21.015

=

689550

2. Change in expected rate to 4%

Present age= 35; Retirement age= 55

1. Amount of present savings= $200,000

2. Amount added after a year = $10000 every year

3. Annual return= 4%

4. FV of the investment= 200,000*(F/P,4%,20) + 10000*(F/A,4%,19)

=200,000* 2.191 + 10000* 27.671

=

714910

3. Change in amount saved annually

Present age= 35; Retirement age= 55

1. Amount of present savings= $200,000

2. Amount added after a year = $20000 every year

3. Annual return= 6%

4. FV of the investment= 200,000*(F/P,6%,20) + 20000*(F/A,6%,19)

=200,000* 3.207 + 20000*33.760

=

$1,316,600

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