Liz is retiring from the US Postal Service and will turn 70 next year. After 39...
Liz is retiring from the US Postal Service and will turn 70 next year. After 39 years of service, her monthly pension is $7,500. She does not qualify for Social Security. Liz has accumulated $700,000 in her thrift savings plan. The government requires that she convert it to an annuity or move it to a IRA. All of the money is pretax and tax can be avoided if it is moved to the IRA. The annuity will be calculated based on her life expectancy of 17.5 years after age 70. The current US Treasury long-term bond rate is 3 percent. Should Liz take the annuity or move the money to the IRA? The tax regulations require that she take out 4 percent of the amount each year.
Homework Answers
1)Calculation if it is moved to IRA
interest rate is 3% available on treasury bills.So If LIZ invests in IRA
than 7,00,000*3/100=21,000 p.a will be available as yearly amount if invested in IRA.
2)Calculation if it is converted to Annuity.
Formula
Future Value=Annuity(CVAF)(r,n)
7,00,000=Annuity(1+.04/2)17
7,00,000=Annuity(1+.02)17
7,00,000=Annuity(20.12)
Annuity=34,979.01
So compared to IRA Annuity is better as more amount is received p.a.
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