Question

4) For your pension, you plan to save $5000 every 6 months into a fund. The fund pays interest at 6%, compounded bi- annually. You will have the choice of retiring after 25 years or after 30 years. What difference will waiting the extra 5 years make to the future value of your pension? (9 marks)

Answer 1

In simple terms Future value (FV)=PV+interest

=PV*(1+r)ñ

=PV*(1+r)power of n

In above formula

PV is present value of cash outflow

r is interest rate

n is number of years for retiring

And in given question

Plan to save $5000 every 6 months during 25 or 30 years

Compounded bi annual means semi annual @6%

For annual compound rate should be 12% but due to plan for every 6 months that rate also should be 6%(12/2)

=$5000*(1+ 0.06)power of 25 years

=$274,322.56

And for 30 years

=$5000*(1+.06)power of 30years

=$395,290.93

Therefore waiting for next 5 years will gives $120,968.37 ($395,290.93-$274,322.56).

Thank you:-)

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