It is December 31, 2011, and 30-year-old Camille Henley is
reviewing her retirement savings and planning for her retirement at age 60. She
currently has $55,000 saved (which includes the deposit she just made today)
and invests #2,000 per year (at the end
of the year) in a retirement account that earns about 9% annually. She has
decided that she is comfortable living on $40000 per year (in todayҀ™s dollars)
and believes she can continue to live on that amount as long as it is adjusted
annually for inflation. Inflation is expected to average 2.36% per year for the
foreseeable future. After researching information on average life expectancy
for females of her background, her plan will assume she lives to age 90. She
will withdraw the amount needed for each year during retirement at the
beginning of the year. So, on December 31 at age 60, she will make her last
deposit of $2,000 and the following day (January 1) she will withdraw her first
installment for retirement.
1. If
Camille continues on her current plan, will she be able to accomplish it?
2. How would
the situation change if Camille were to start placing her $2,000 annual savings
into her retirement account on January 1st of each year rather than December
31st of each year? Assume that the investment still pays interest at the end of
the year.
3. If
Camille resumes making her deposits at the end of the year, how much would she
have to save each year to accomplish her objective?
4. Assume
that Camille continues with her current plan. What interest rate would she have
to earn on her investment to make it work?
5. If
Camille wishes to leave a $50,000 perpetuity to her alma mater, starting one
year from the year she turns 90, then how much extra money would she need to
have on December 31st of the year she turns 90? Assume that the investment will
earn 9%.
6. Rework
the previous question for the case where Camille wants the university investment to grow by 5% per year.