A. If you deposited the following amount per month ($500) from your paycheck fro

Question

A. If you deposited the following amount per month ($500) from your paycheck from the time you graduate from school (2016) until you retire (at age 73) and your employer matched your contribution (i.e. he/she deposited the same amount to your retirement account), how much wealth would you have accumulated? (Be sure to include your age when you graduate). The annual interest rate you will earn should be = letters in your first name X = 1.05%. There are 11 letters in my first name. I will be 23 when I graduate in 2016. B. If you waited for 8 years after graduation to begin this retirement plan, what would your balance be at retirement? C. Based on your final answers to A above, what would your retirement income be once you retired if you a. earned 4.25% and only lived off the earnings (did not draw down the principle-every month you took out the interest and left the initial amount to earn the same amount of interest-think simple interest) b. earned 5.25% and created an annuity to last until you were 85 years old (this means that by age 85 your balance should be equal to zero). D. Write at least 2 paragraphs on the costs and benefits (risks and rewards) of each of the plans outlined in number C.

Explanation / Answer

(a) Number of months until I retire = (73 - 23) x 12 = 600 months

Annual interest rate = 11 x 1.05% = 11.55%

So monthly interest rate = 11.55 /12 = 0.96%

Hence,

Future (Total) Value = monthly deposit x Future value interest factor of annuity, 0.96%, 600 months **

= $500 x [(1.0096)600 - 1] / 0.0096 = $16,028,578

** Future value interest factor of annuity = [(1 + Interest Rate)Number of Periods - 1] / Interest rate

(b) If I wait for 8 years, number of years will reduce to 42 & so, number of moneths = 42 x 12 = 504

So, future value now = $500 x [(1.0096)504 - 1] / 0.0096 = $6,374,307

(c)

(a) Total investment = $16,028,578

4.25% annual interest is equivalent to (4.25% / 12) = 0.35% per month

So, monthly interest income = $16,028,578 x 0.35% = $56,100 per month

There are total 4 questions (3rd question having 2 sub-questions), out of which the first 3 have been answered.

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