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. A church that a registered representative (RR) attends plans to raise the funds necessary ...

    The correct answer is c) Although church bonds are normally considered to be exempt securities, the RR is obligated, by NASD ...
  2. Which of the following statements is (are) true with respect to the calculation of ...

    The correct answer is: a) (I) is incorrect because results that cover a period of less than a year must "not" be annualized. ...
  3. Which of the following terms are associated with the purchase/redemption of open-end ...

    The correct answer is b. Forward pricing is the SEC Rule that requires all transactions in open-end investment company shares ...
  4. Joanne Bume, CFA, is the head of research at large brokerage firm ...

    The correct answer is: a) The proper course of action would simply be to place Universal Airlines on a restricted list until ...
RELATED TERMS
  1. No results found.

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!