Maryanne, a baby boomer who turns 50 today, begins to save for retirement with $
ID: 2639328 • Letter: M
Question
Maryanne, a baby boomer who turns 50 today, begins to save for retirement with $200,000 that she just receives from a trust fund. She immediately invests this $200,000 in a stock fund. In addition, she plans to contribute $10,000, $15,000, and $20,000, respectively, at the end of the next 3 years to the same stock fund. The stock fund generates a nominal rate of return of 10%, compounded annually. (a) What will be the value of her stock fund when she retires at the age of 67? (b) Right after her retirement, she transfers her nest egg into a conservative investment that compounds monthly. If Maryanne wants to withdraw a fixed monthly payment of $7,000 from this investment indefinitely, what should be the annual rate of return of this conservative investment? Detailed response please!
Explanation / Answer
a> Investments and no of years : Y0=200000 (17), Y1=10000(16) ,Y2=15000(15), Y3=20000(14) Interest Rate=10% FV when Maryanne is 67= 200000*(1.1^17)+10000*(1.1^16)+15000*(1.1^15)+20000*(1.1^14) 1195452.476 b> Annuity = A=7000 per month PV of Perpetuity=(A*12)/I=1195452 or Interest Rate=(7000*12/1195452) 0.0703 or Annual Rate=7.03% (1+r)^12-1=7.03 or (1+r)^12=8.08 or 1+r=8.036^(1/12) 1.1897 or 1+r=1.1897 or r=0.189% Annual Rate=0.189*12 2.27