Q:

Janet Spears is planning to retire in 7 years and plans to start saving $15,000 a year beginning at the end of this year until the date she retires. She currently has $280,000 at the bank. Once she retires, she plans to start redeeming $21,000 each year for 26 years. If she can expect to earn 9% before her retirement and 7.5% after her retirement, which of the following answers would best describe her situation?
a) On her retirement date, she'll have a surplus of $412,568.
b) On her retirement date, she'll have a surplus of $35,245.
c) On her retirement date, she'll have a surplus of $142,895.
d) On her retirement date, she'll have a deficit of $35,245.

A:

The correct answer is: a)
Step 1: How much will she have accumulated her wealth by the time she retires?

PV = 280,000; PMT = 15,000; N = 7; I = 9%

Therefore, FV = 649.875

Step 2: How much will she need by her retirement date in order to finance her retirement
income?

PMT = 21,000; N = 26; I = 7.5%

Therefore, PV = 237,289

Step 3: Surplus/Shortfall at retirement

= (what she'll have) - (what she'll need)

= 649,857 - 237,289

Surplus = 412,568


2005 CFA Level 1 LOS: 2.1.A.a-2.1.A.c


RELATED FAQS

  1. No results found.
RELATED TERMS
  1. Continuing Care Retirement Community

    A residential facility providing meals, healthcare and social ...
  2. Retirement Planning

    The process of determining retirement income goals and the actions ...
  3. Retirement Readiness

    The state and/or degree of being ready for retirement. Retirement ...
  4. Excess Accumulation Penalty

    The penalty a retirement account owner or the beneficiary of ...
  5. Retirement Planner

    A practicing professional who helps individuals prepare a retirement ...
  6. Forced Retirement

    The involuntary ending of one's career because of a layoff, health ...
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center