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hello sir,
I have a question on annuity the second of the below question is not clear.
Suppose you wish to retire forty years from today. You determine that you need $50,000 per year once you retire, with the first retirement funds withdrawn one year from the day you retire. You estimate that you will earn 6% per year on your retirement funds and that you will need funds up to and including your 25th birthday after retirement.
a) How much must you deposit in an account today so that you have enough funds for retirement?
for this one I used the due annuity formula and got the answer: 677517.88b) How much must you deposit each year in an account, starting one year from today, so that you have enough funds for retirement?
this part is confusing. We should first calculate the ordinary anuity and get the amount divided by 25?
This question is unclear. My understanding is that you’ll be saving $50000 per year up to 25 year after you retire to earn a return on investment of 6 percent per annum. Firstly you should determine how much you want to have in your account after 40 years. Which is 50000*((1.06^26-1.06)/0.06) which is $2907500 then use an appropriate discount rate to determine how much to save each year up to 40 years (annuity). For instance let say your discount is 8 percent then the annual savings will be 2907500/11.925 which is 243815 per annum. Annuity of 8 percent is 12.925. As you can see the amount you’re looking for depends on the discount rate. I bet you know that that rate is determine by the market (bank)
Hope you enjoy this answerNote that I did not discount the 2907500 over 25 years to determine the present value of that money at the beginning of your retirement because it also requires a discount rate that was not given in your question
mefinyapascal27: Please do not answer questions in this forum – it is the Ask the Tutor Forum and you are not the tutor (but please do help people in the other F2 forum 🙂 )
kunal10: Why have you asked exactly the same question twice? Please do not do that.
I have answered your other post of this question.
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