The Ritz Company has a 40-year-old employee that will retire at age 60 and live to age 75. The firm has promised a retirement income of $20,000 at the end of each year following retirement until death. The firm's pension fund is expected to earn 7 percent annually on its assets and the firm uses 7% to discount pension benefits. What is Ritz's annual pension contribution to the nearest dollar for this employee? (Assume certainty and end-of-year cash flows.)

Question

Quizplus · Accepted Answer

To find the annual pension contribution, first calculate the present value of the retirement annuity at the retirement age using the formula for the present value of an annuity. Then, calculate the annual contribution needed to reach that present value by the time the employee retires, using the future value of an annuity formula. The correct calculation results in an annual contribution of approximately $4,443.

The Ritz Company Has a 40-Year-Old Employee That Will Retire