Jenny works as an accountant and is planning to retire in 25 years from now. She is thinking about creating a fund that will allow her to receive $25,000 at the end of each year for 30 years after her retirement. She is expecting to earn 8.5% per year during the 30-year retirement period.
Required:
a. To provide the 30- year, $25,000 a year annuity, calculate how much should be in the fund account when Jenny retires in 25 years.
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Future value of fund in 25 years
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N=30
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PMT=($25,000)
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I=8.5%
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FV=0
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PV=$268,671.10
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When jenny retires in 25 years, there should be $268.671.10 in her account.
b. How much will Jenny need today as a single amount to provide the fund calculated in part (a) if she earns 6.5% per year during the 25 years preceding retirement?
Jenny needs $55,562 today as a lump sum amount.
c. What effect would increase in the interest rate, both during and prior to retirement, have on the values calculated in parts (a) and (b)? Explain why.