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 end of each year.How much interest will he earn during his retirement years if he will average 12 percent per year on his retirement account?
A)$994,699
B)$1,060,200
C)$1,029,414
D)$972,941

Question

Quizplus · Accepted Answer

John Adams plans to retire at 62 and live until 87, a total of 25 years in retirement. To receive an annual income of $60,000, he will need to accumulate a retirement fund of $1,500,000 ($60,000 x 25). If he averages 12 percent per year on his retirement account, he will earn an average of $180,000 per year ($1,500,000 x 0.12) in interest during his retirement years. Therefore, the total interest he will earn during his retirement years will be $4,500,000 ($180,000 x 25). However, as he will draw the money at the end of each year, he will not earn interest on the full amount until the end of each year. Using the future value of an annuity formula, the total interest he will earn during his retirement years comes out to be $1,029,414. Therefore, the best choice is C.

John Adams Plans to Retire at the Age of 62