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at age 62 and buys an annuity at that time, for each $1,000 that she puts
into the annuity she will receive an annual benefit equal to $79 for the
subsequent 18 years. If she waits until age 65 to retire, each $1,000
invested in the annuity will produce an annual benefit of $89.94 for the
15 years.
Carolyn plans to place any funds currently available into a savings
account paying 6% compounded annually until retirement. She does not
expect to be able to save or invest any additional funds between now and
retirement. For every dollar that Carolyn invests today, she will have
$1.50 by age 62; if she leaves the money invested until age 65, she will
have $1.79 for each dollar invested today.
Questions
a.
Assume that Carolyn places currently available funds in the
savings account. Determine the amount of money Carolyn will
have available at retirement once she sells her house if she retires
at (1) age 62 and (2) age 65.
b.
Using the results from item a, determine the level of annual
income that will be provided to Carolyn through purchase of an
annuity at (1) age 62 and (2) age 65.
c.
With the results found in the preceding questions, determine
the total annual retirement income Carolyn will have if she retires
at (1) age 62 and (2) age 65.
d.
From your findings, do you think Carolyn will be able to
achieve her long-run financial goal by retiring at (1) age 62 or (2)
age 65? Explain.
e.
Evaluate Carolyn’s investment plan in terms of her use of a
savings account and an annuity rather than other investments.
Comment on the risk and return characteristics of her plan. What
recommendations might you offer Carolyn? Be specific.
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