In: Finance
1. You wish to retire with $5 Million in 45 years. You estimate you will earn 8% on your investments. How much must you invest each year in order to reach your goal?a. Ordinary (1st payment made at the end of the year)b. Due (1st payment made today)
2. You would like to withdraw $60,000 per year during retirement. You expect to live 20 years after you retire at age 65. How much do you need to have saved by the time you retire if you can earn 4% on your funds?
1.a.Information provided:
Future value= $5,000,000
Time= 45 years
Interest rate= 8%
Ordinary Annuity refers to an annuity that occurs at the end of the period. The future value of an ordinary annuity can be computed with the help of a financial calculator in the default END mode.
Enter the below in a financial calculator to compute the annual investment:
FV= 5,000,000
N= 45
I/Y= 8
Press the CPT key and PMT to compute the amount of annual investment.
The value obtained is 12,936.42.
Therefore, the amount of ordinary annuity is $12,936.42.
b.Annuity due refers to annuity that occurs at the beginning of a period.
This can also be solved using a financial calculator by inputting the below into the calculator:
The financial calculator is set in the end mode. Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2nd BGN 2nd SET on the Texas BA II Plus calculator.
Enter the below in a financial calculator to compute the annual investment:
FV= 5,000,000
N= 45
I/Y= 8
Press the CPT key and PMT to compute the amount of annual investment.
The value obtained is 11,978.17.
Therefore, the amount of annuity due is $11,978.17.
2.Information provided:
Annual withdrawal= $60,000
Time= 20 years
Interest rate= 4%
The question is solved by computing the present value.
Enter the below in a financial calculator to compute the present value:
PMT= 60,000
N= 20
I/Y= 4
Press the CPT key and PV to compute the present value.
The value obtained is 815,419.58.
Therefore, I need to save $815,419.58 by the time I retire.
In case of any query, kindly comment on the solution.