QUESTION 1 Charles Wong who is 35 years old wishes to retire at age 65. He will be able to save $10,000 per year starting now for the next 10 years. After that due to reduction in his expenses and increase in earnings, his savings will increase at 5% per year for the remaining 20 years. Currently he also owns a downtown condominium worth $800,000. Ignore taxes. 1. If his annual savings over the next 30 years are invested earning 6% per year and the value of the condominium appreciate at 4% per year, how much will he have on retirement? 2. He expects to live to age 95. If at age 65 he uses all his wealth (including proceeds from sale of the condominium) to purchase an annuity that pays 6% per year, how much can he withdraw at the end of each year (year 66 to 95 inclusive) and end up with a zero balance in the year of his expected death? 3. Assume all the conditions in part 2 except he would like to leave an estate of $2,000,000 when he dies. How much he can withdraw from the account at the end of each year (year 66 to 95 inclusive).
QUESTION 1 Charles Wong who is 35 years old wishes to retire at age 65. He will be able to save $10,000 per year starting now for the next 10 years. After that due to reduction in his expenses and increase in earnings, his savings will increase at 5% per year for the remaining 20 years. Currently he also owns a downtown condominium worth $800,000. Ignore taxes. 1. If his annual savings over the next 30 years are invested earning 6% per year and the value of the condominium appreciate at 4% per year, how much will he have on retirement? 2. He expects to live to age 95. If at age 65 he uses all his wealth (including proceeds from sale of the condominium) to purchase an annuity that pays 6% per year, how much can he withdraw at the end of each year (year 66 to 95 inclusive) and end up with a zero balance in the year of his expected death? 3. Assume all the conditions in part 2 except he would like to leave an estate of $2,000,000 when he dies. How much he can withdraw from the account at the end of each year (year 66 to 95 inclusive).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:QUESTION 1
Charles Wong who is 35 years old wishes to retire at age 65. He will be able to save $10,000 per
year starting now for the next 10 years. After that due to reduction in his expenses and increase in
earnings, his savings will increase at 5% per year for the remaining 20 years. Currently he also
owns a downtown condominium worth $800,000. Ignore taxes.
1. If his annual savings over the next 30 years are invested earning 6% per year and the value of
the condominium appreciate at 4% per year, how much will he have on retirement?
2. He expects to live to age 95. If at age 65 he uses all his wealth (including proceeds from sale
of the condominium) to purchase an annuity that pays 6% per year, how much can he
withdraw at the end of each year (year 66 to 95 inclusive) and end up with a zero balance in
the year of his expected death?
3. Assume all the conditions in part 2 except he would like to leave an estate of $2,000,000 when
he dies. How much he can withdraw from the account at the end of each year (year 66 to 95
inclusive).
4. Continuing with part 3, after he has been retired one year, and just before he makes his first
withdrawal, how much will be in the account?
5. Of his annual withdrawal at the end of year 1, which was calculated in part 3, how much
constituted withdrawal of principal and how much was interest? Will this breakdown of
principal and interest remain constant over the 30 years of his retirement? Of the last
withdrawal how much will be the interest income and how much will be the principal
repayment?
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