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You plan to retire at age 65, you are 30 years old; and you wish to...

You plan to retire at age 65, you are 30 years old; and you wish to save for an annuity, which will payout $50,000 a year for 20 years when you retire. Approximately, how much should you start saving annually for retirement; given a rate of 5% for the annuity and the same rate for your savings investment fund?

A.$6,898.90

B.$9,064.99

C.$6,894.89
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Answer #1

Solution:

Required future value at the age of 65 = Present value of future withdrawl at age of 65

= $50,000 * Cumulative PV factor at 5% for 20 periods

= $50,000 * 12.46221 = $623,110.50

Required annual savings for 35 years in order to get desired future value = $623,110.50 / Cumulative FV factor at 5% for 35 periods of ordinary annuity

= $623,110.50 / 90.32031

= $6,898.90

Hence option A is correct.

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