Financial Management - Retirement

Retirement

Huber Sanchez

Argosy University

Financial Management

7/1/2015

Issue A

Mary is going to retire in one year.  She has been saving $500.00 a year for the last 19 years for her retirement.  She will make one more deposit for $500.00 before she retires and wants to know how much she will received after she closes her account, which earns 5% interest per year.

The calculation for this is as follows:  Future value (FV), interest earn (rate), Time (n) and payment (pmt)   FV = PV (1 + r) n   4[pic 1]

May will have $16,532.98 at the time she closes this account.  

                                                Issue B

The university that Mary has work for the last 25 years has offered her a bonus to her retirement package.  They are offering her $75,000 a year for 20 years starting one year from her retirement date and each year for 19 years after that date.  Mary would prefer a onetime payment the day after she retires.  The amount of this would be

[pic 2]

Mary would be receiving over three million dollars if she decides to go with the university’s plan but if she decides to a get a onetime payment after her retirement it would only be $1.5 million.  She is better off receiving the money for the next 20 years than a one payment.

Issue C

Mary has been asked to stay in her position nor another three years because her replacement was hired by another school.  The board assumes that the bonus should remain the same, but Mary knows that the present value of her bonus will change.

The present value of Mary’s bonus is $794,551.07 but if Mary stays another three years her present value changes to $845,414.05.   The difference is $50,862.98 which is significant amount of money.

Issue D

Mary has decided to help pay for her granddaughter Beth’s education.  Mary has decided to pay for half of her tuition cost at States University.  The tuition right now is $11,000 per year.  Beth has just turn 12 years and she has decided to attend college on her 18th birthday.  Tuition is expected to increase by 7% each year. By the time Beth is ready to start college, the tuitions will be $15,620 (calculations: 11000 X .07 = 770.   770 X 6 = 4620.   4620 + 11000 = 15,620).  When Beth finishes school the tuition will be $18,700.  The second year will be $16,390, third year $17,160 and her final year $17,930.  The grand total for Beth’s four years of school is $67,100.  Mary has decided to pay for half of this amount which is $33,550.  Mary would have to deposit $3,641.11 each year until Beth turns 18 years old.  The money would be earning compound interest each year therefore increase the amount of money in the savings account.   The reason is eight years and not 10 years is because Beth would start withdrawing this money when she starts school and the interest is paid on the money that is on the bank.  If Beth takes money out, the interest that is being paid is on the remaining balance on the account which will be earning less because there is less money earning interest.