Question

Mini case #1 - Retirement Planning

This assignment is to be completed in Excel. When completed, submit the exercise by the due date in Blackboard (BB) and Attach a copy of the excel spreadsheet.

Case Narrative:

Ann E. Belle is age 45 and plans to retire in 20 years (at age 65). She has retirement savings in a mutual fund account, which has a current balance of $150,000 (Ann does not plan to add any additional money to this account). Also, Ann opened a 401K retirement account with her new employer and will contribute $15,000 per year into her 401K until retirement.

• If Ann’s mutual fund account grows at an annual rate of 8.0% how much money will Ann have in her mutual fund account at age 65?

• If Ann’s 401K account grows at an annual rate of 8.0% per year, how much money will Ann have in her 401K account at age 65?

• What is the total investment balance of Ann’s retirement account at the age of 65?

• At retirement, Ann plans take the investment balance from her mutual fund account and the balance from her 401K account and combine them into an IRA account. To minimize risk, her IRA account will invest in more conservative securities. As a result, Ann anticipates her annual IRA returns to be about 5.0% during retirement. While in retirement, Susan plans to withdraw $100,000 per year from her IRA account over the next 25 years. Is this possible? Explain why or why not?

Answer 1

First question:

Given, present balance in Mutual Fund account is $150,000 and no further deposit is made to that account. Annual growth rate is 8%.

Balance available in Mutual Fund Account at the age of 65= $699,143.57 calculated as the Future Value as follows:

Second question:

Yearly contribution of $15,000 into 401K account constitutes a uniform series payment (annuity). Amount available in the account on retirement= $686,429.46 calculated as the Future Value of Annuity as follows:

Third question:

Total investment balance of retirement account at the time of retirement = $699,143.57 + $686,429.46

=$1,385,573.03

Last question:

Interest rate on IRA account is given as 5% and the yearly withdrawals planned is $150,000 for 25 years. Amount required as on the date of retirement, in order to support these withdrawals is $2,114,091.68 calculated as the present value of annuity as follows:

However, balance available in the investment account is less, at $1,385,573.03 as above. Hence the withdrawal plan is not possible.