Reference no: EM133377027
Anna just turned 27 today on December 31st, 2022, and she is just finishing her first year of work in a new job. She works for TVM Inc. and currently earns $40,000 a year, but starting tomorrow, on January 1st, 2023, her salary will grow by 3% per year. Anna has recently received a $90,116 inheritance, which, combined with the regular savings she can put aside from her salary, give her two options to evaluate for the goal of building a retirement fund[1]. She plans to retire at the end of the year right when she turns 65, on December 31st, 2060.
Option 1: Invest the inheritance now (on January 1st, tomorrow) in a GIC (Guaranteed Investment Certificate) offering a fixed interest rate of 4% compounded annually. In addition, she plans to make one annual deposit in a mutual fund at the end of each year, of savings representing 5% of her annual salary. This mutual fund should earn a return of 6% per year, compounded annually. Anna will make the first deposit in the mutual fund a year from today, and her last deposit will be right when she turns 65 and retires.
Option 2: Alternatively, Anna can invest now in financing an MBA program she is already admitted to, which will increase her salary after completion. The 2-year MBA program starts tomorrow, and Anna would then pay its $35,000 tuition tomorrow, using her inheritance. She will invest the rest of the inheritance, now, in the same GIC as option 1.
Upon graduation on December 31st, 2024, Anna will get a promotion and her new salary will be $60,000 starting the next day. Anna expects that this salary will grow at a rate 4% per year. She will then start her annual savings on the same mutual fund as option 1. Her saving rate will be 6% of her annual salary, with a first deposit three years from today, and a last contribution when she turns 65, like option 1.
Use 4 decimals for all interim calculations, and round your final answers to the dollar (no decimal)
Questions
1. If Anna chooses option 1, how much money will she have in her savings when she retires?
2. If Anna chooses option 2, how much money will she have in her savings when she retires? (Round your final answers to 2 decimals).
3. Which option should Anna choose?
4. When she retires, Anna plans on drawing the same annual amount from her retirement fund (using the option you selected in question 3 above) for 20 years. Her first withdrawal will be one year after retirement[2]. How much can she withdraw every year in retirement (nothing will be left after the last withdrawal). The savings will continue to earn 6% (compounded annually).