John Adams plans to retire at the age of 62.He wants an annual income of $60,000 per year.He believes that he will live to be 87.He will draw the money at the beginning of each year.How much money will he need when he retires in order to support his $60,000 annual life style if he will average 12 percent per year on his retirement account?
A)$527,059
B)$470,586
C)$505,302
D)$439,800

Question

Quizplus · Accepted Answer

First, we need to find the present value of an annuity due with $60,000 payments for 25 years (age 62 to 87) at a rate of 12% per year. Using the formula for present value of an annuity due:
PV = (PMT x ((1 + r)^n - 1) / r) x (1 + r)
Where PV is the present value, PMT is the annual payment, r is the annual interest rate, and n is the number of years/periods.
PV = ($60,000 x ((1 + 0.12)^25 - 1) / 0.12) x 1.12
PV = $527,059. Therefore, John Adams will need $527,059 when he retires in order to support his $60,000 annual life style if he will average 12 percent per year on his retirement account. Therefore, the best choice is A.

John Adams Plans to Retire at the Age of 62