A retirement plan guarantees to pay you or your estate a fixed amount for 20 years. At the time of retirement, you will have $31,360 to your credit in the plan. The plan anticipates earning 8% interest annually over the period you receive benefits. How much will your annual benefits be, assuming the first payment occurs one year from your retirement date?

Question

Quizplus · Accepted Answer

To calculate the annual benefits, we need to use the present value of an annuity formula:

PV = A * [(1 - (1+r)^(-n))/r]

where:
PV = present value ($31,360)
A = annual benefits (unknown)
r = interest rate per year (8% or 0.08)
n = number of years (20)

Plug in the values and solve for A:

$31,360 = A * [(1 - (1+0.08)^(-20))/0.08]
$31,360 = A * 9.818
A = $3,194 (rounded to the nearest dollar)

Therefore, the annual benefits will be $3,194, which is answer choice D.

A Retirement Plan Guarantees to Pay You or Your Estate